Cytec Doubles Down on Chemicals

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With massive competitors such as Pfizer (NYSE: PFE), Novartis AG (NYSE: NVS), and even Merck (NYSE: MRK), life can be tough for the smaller players in the pharma business, such as for Belgian company UCB. Success means a laser focus. So it is no surprise that UCB decided to unload its chemicals division, Surface Specialties.

The buyer is Cytec Industries (NYSE: CYT), a leading specialty chemical products company with penetration in plastics, coatings, water treatment, and other areas.

The price tag comes to $1.85 billion, which equates to nine times Cytec's 2004 EBITDA (earnings before interest, tax, depreciation, and amortization).

However, Cytec does not want to overburden its balance sheet, so the purchase price is a combination of cash and stock. Cytec will also structure a new credit facility and a bridge loan. After the transaction is completed, UCB will own about 12% of Cytec.

Thus, with the stroke of the pen -- and some sophisticated financing -- Cytec will double its annual revenues. But this is not revenue for revenue's sake. The acquisition is expected to add to earnings immediately.

What's more, the deal will broaden Cytec's product portfolio in coatings and environmentally friendly products. Cytec believes in the long-term growth potential in chemicals and is making the necessary investments to maintain its leadership.

Good news, right? Not according to investors. Cytec's stock price fell nearly 7% to $45.61 on Friday. While the acquisition looks good on paper, it is still a huge undertaking with enough inherent risk to make investors jittery.

Fool contributor Tom Taulli does not own any of the shares mentioned in this article.