As expected, British oil giant BP
On Sept. 12, BP filed the IPO paperwork to offer $1 billion of Innovene (a partial sale). It appears that, instead of having to deal with the market variables of an IPO and questions about its long-term intent for the remaining shares, BP decided to jettison the entire unit in an all-cash deal. But is the sale a good deal for BP shareholders?
First, let's examine Innovene's profitability, which has recently grown to reflect the strong chemical industry worldwide. For just the first six months of 2005, sales were $11.1 billion, and operating profits were $863 million (before a $21 million restructuring charge). That's more than twice the profit the company made last year; for all of 2004, it logged operating income of $405 million (before $345 million in asset impairment and restructuring charges).
The sharp increase in operating income pales when you compare Innovene's 7.8% operating margins with other chemical companies. Motley Fool Income Investor recommendation Dow Chemical's
Let's compare the deal on an after-tax P/E basis. Annualize the earnings before taxes for the first half ($779 million, which provides a liberal assessment of what earnings will be). Then apply Innovene's 30% first-half tax rate. You end up with $1,090.6 million in after-tax profits. Divide that into the $9 billion selling price, and the earnings multiple is 8.25. Sector counterpart DuPont currently trades for roughly 15 times current-year expectations, while Dow trades for about 10 times current-year expectations.
Based on this apparently liberal earnings projection, BP is selling this asset below its market multiple. Then again, Innovene has not been a strong profit producer over the previous three years, and an economic downturn would send results far below today's levels. It looks like BP got a reasonable price for Innovene, and shareholders should be happy that the company has completely cut its ties with this low-margin business segment.
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