Hercules Inc. sold; another headquarters to leave area

Heralding more deals in the specialty-chemical business, Hercules Inc. of Wilmington was sold yesterday for $2.6 billion, a day after Philadelphia's Rohm & Haas Co. was sold for $18.8 billion.

If shareholders approve the sale of Hercules to Ashland Inc. of Covington, Ky., and Rohm & Haas to Dow Chemical Co. of Midland, Mich., the region will lose two major company headquarters and some headquarters job, while sparking deal interest across the industry.

"With Hercules-Ashland and Rohm & Haas-Dow we're getting the ball rolling," said Robert Felice, analyst at Gabelli & Co., the brokerage affiliate of Gamco Investors Inc., one of Hercules' largest shareholders. "Specialty chemicals is the space to be in."

In a report last month, Felice cited Hercules along with Arch Chemicals Inc. of Norwalk, Conn., Ferro Corp. of Cleveland, and the Lubrizol Corp. of Wickliffe, Ohio, among companies most likely to catch bargain-hunters' interest as the industry slows and larger players look to consolidate - all without competition from private-equity firms sidelined by the credit crunch.

The price for Hercules works out to $23.01 a share, a 38 percent premium over Thursday's close, but less than half Hercules' value at its peak in 1995-97, when it was a larger company. Ashland is borrowing the money from Bank of America and other lenders.

Dow had agreed to buy Rohm & Haas for $78 per share, or a premium of roughly 74 percent over its close Wednesday. It plans to make the purchase with help from billionaire Warren Buffett, the government of Kuwait, and big New York banks.

"Hercules shareholders are going to look at the premium that Dow paid yesterday for Rohm & Haas, and maybe be disappointed with the pricing here," analyst Michael Harrison of First Analysis Securities Corp. in Chicago said during a conference call.

Buckingham Research Group Inc. analyst John Robert told the Associated Press that he doesn't think the Hercules acquisition is part of a broader industry consolidation. "These were two acquirers with substantial cash windfalls that were known to be looking for deals."

Ashland - like Dow - said it was taking advantage of falling U.S. stock prices to buy a smaller company with promising products in foreign markets and less dependence on petroleum as a raw material.

Hercules - like Rohm & Haas - had laid out cost-cutting and foreign-expansion plans to help cope with higher oil prices, but gave up hopes of staying independent as U.S. industrial demand fell faster than expected this year.

"The risks now are different than they looked six months ago," Hercules chief executive officer Craig A. Rogerson said in a conference call with investors. Hercules' board and management agreed the Ashland offer "was a good opportunity that we should take advantage of," Rogerson said.

Hercules employs 4,700 people at plants in the United States and abroad, including about 570 at its boxy green-glass headquarters overlooking the Brandywine, its research lab near its former country club site outside Wilmington, and other facilities in the region. That's down from 10,000, across the company, in 2000.

Rohm & Haas employs roughly 15,700 people worldwide, and 3,100 in the Philadelphia region, with its headquarters in a modernistic office building facing Philadelphia's hallowed Independence Mall.

Ashland chief executive officer James J. O'Brien, in a conference call with investors, said the company expects cost savings of $50 million by 2011 by combining computer systems, cutting "backroom overhead," and getting volume discounts on raw materials. He called that estimate "very conservative."

Neither Ashland nor Hercules would say how many people will lose their jobs.

Hercules spent $377 million on sales and general and administrative expenses last year.

The heads of Hercules' two main business groups, Paul Raymond of Hercules Paper Technologies and John Panichella of the Aqualon industrial-thickeners unit, and other key Hercules staff "will be joining Ashland to continue running these successful businesses," said Ashland's O'Brien.

Ashland blends and retails Valvoline motor oil, runs a fleet of tanker trucks to distribute chemicals, and makes polyester and vinyl resins, metal castings, and water-purification technology, among other products. It sold its oil refineries and gas stations in 2005, spokesman Jim Vitak said.

Even after buying Hercules, "40 percent of Ashland's revenue will still come from distribution and from Valvoline, which, one could argue, are really non-core to future growth of the company," said Felice, the analyst at Gabelli & Co., Hercules' fifth-largest shareholder, with more than five million shares, worth over $100 million. O'Brien said he has no plans to sell those businesses.

Negotiations leading up to the deal started six weeks ago, said Ashland spokesman Vitak. Hercules sales for the year ending March 31 totaled $2.2 billion. Ashland sales totaled $7.9 billion.

Dow agreed to pay about 10 times Rohm & Haas' cash flow, while Ashland is only paying about eight times Hercules' cash flow. O'Brien said Hercules has environmental and asbestos liabilities that could cost Ashland in the future. He wouldn't estimate the expense.

The planned Hercules sale would end a string of business reorganizations and occasional shareholder fights over the company's direction in the last decade.