What: Shares of specialty ingredient maker Balchem Corporation (NASDAQ:BCPC) popped 14% as of 11:00 a.m. ET on Tuesday after announcing an acquisition.
So what: Balchem is buying Albion International, a manufacturer of mineral amino acid chelates, specialized mineral salts, and mineral complexes, for $111.5 million in cash. The price is 10.7 times the company's 2015 EBITDA on about $53.5 million in revenue. The acquisition will be made with Balchem's revolving credit facility and cash on hand.
Now what: From a strategic perspective, this adds key ingredients to Balchem's portfolio and the company could generate some synergies and even additional sales given its size. I also think the fact that it's paying cash and not diluting shareholders is a positive for future earnings.
The one thing to watch after the deal closes is that there's sufficient return to justify the acquisition. A price of 10.7 times EBITDA may look cheap compared to Balchem trading at 14.9 times EBITDA, but it's still a step management needs to prove was worthwhile over the next few years. For today, the market loves the move and that's why shares have popped more than the value of the buyout itself.
Travis Hoium has no position in any stocks mentioned. The Motley Fool recommends Balchem. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.