Shares of Nexeo Solutions (NASDAQ: NXEO) rose nearly 17% today after the company announced that it had agreed to terms to be acquired by chemical and food ingredients distributor Univar (NYSE:UNVR). The proposed cash and stock deal has a total price tag of $2 billion, although that includes all of the smaller player's debt and other obligations.
The net acquisition price works out to $11.65 per share, or a market cap of roughly $1.05 billion, comprising cash and stock. For each share of Nexeo Solutions owned, shareholders will receive $3.29 in cash plus 0.305 shares of Univar.
As of 2:10 p.m. EDT, Nexeo Solutions stock had settled to a 14.7% gain. Univar shares had gained 2.8%.
The combination is expected to deliver an immediate reduction in annual capital expenditures of about $15 million and up to $100 million in annual run rate cost synergies by the third year of integration. Successfully achieving the cost synergies will be critical to maintaining the profitable growth streak of Univar, which reported a 49% year-over-year increase in operating income in the first half of 2018.
More importantly, investors will want to keep an eye on how this merger affects the company's balance sheet. Univar is a $4 billion company, so pulling the trigger on a $2 billion acquisition is a serious move. It exited the second quarter of 2018 with $128 million in cash and $2.59 billion in long-term debt. The cash portion of the Nexeo Solutions acquisition will require $296 million. Meanwhile, Univar will assume $800 million in long-term debt from Nexeo Solutions' balance sheet. In other words, the relative impact to the business -- and balance sheet -- is significant and cannot be overlooked by investors.
The acquisition can prove successful in the long run, especially since chemical and ingredient distribution has higher margins and is less risky than bulk and specialty chemical manufacturing. However, the details surrounding the financing of the deal -- and the near- and long-term effects -- still pose risks to shareholders and will require careful attention going forward. If there's a market downturn in the next few years, then this acquisition could come back to haunt investors.