Quantum Chemical Corp.'s junk bonds were quoted five to 11 points higher yesterday on news that U.K.-based Hanson Plc. announced an agreement to acquire the company.
Although Quantum was long considered a takeover target, Hanson was not among names circulating, analysts said.
"I think it was kind of a surprise," Mike Salshutz, a senior analyst in PaineWebber Inc.'s high-yield group, said yesterday.
The New York-based company has sound core assets, but its stock is depressed, its debt levels are high, and the commodity chemicals industry is in A slump, Salshutz said.
From Hanson's perspective, it can obtain those assets by purchasing the company's stock relatively cheaply, Salshutz said. And Hanson, whose senior debt Moody's Investors Service rates Al, has the financial strength to ride out the cycle, he said.
As for Quantum's bondholders, they "get a huge boost out of this," Salshutz said.
"Quantum has been a takeover target since 1988," said Hope Crifo, a high-yield analyst at Duff & Phelps/MCM Investment Research Co. She said, however, that she had not heard much discussion recently.
Of Hanson, Crifo said. "It's not a name that I had heard of."
But Crifo said that Quantum typifies Hanson's tastes in acquisitions.
Hanson's acquisitions tend to be fairly large multi-operational companies that are "not particularly well run," Crifo said.
According to Crifo, Quantum's 13% senior subordinated debentures of 2004 were quoted yesterday at about 110, up from 105 before the announcement. Quantum's 12 1/2% senior subordinated notes of 1999 were quoted at 109, up from 104-105. Both those issues are callable in March 1994. The company's recently issued 103/8% first mortgage bonds due 2003, which posted the biggest gains, were quoted at 115. up from 104-105 before the news.
"So if you bought them at 100, you are very happy," Crifo said.
According to Quantum's press release, the company is the largest U. S. manufacturer of polyethylene, a leading industrial chemical manufacturer. And through its Suburban Propane Division, it is the second largest U.S. retail distributor of propane gas.
The Hanson-Quantum agreement calls for Hanson to acquire all of Quantum Chemical's outstanding common stock in a tax-free exchange for roughly 42 million new Hanson American Depositary shares at a rate of 1.176 ADS per common share of Quantum Chemical, according to the release. That translates to approximately $20 per Quantum Chemical share, based on Hanson's ADSs' New York Stock Exchange closing price on June 29. About 36 million Quantum Chemical shares are outstanding.
The New York company's roughly $2.5 billion of outstanding debt brings the acquisition's total value to about $3.2 billion, the release says.
"We believe that the current severe and protracted downturn in the polyethylene business is nearing an end," David H. Clarke, deputy chairman and chief executive officer of Hanson Industries, said in the release. "An expansion of the economic recovery and the steady absorption of capacity within the polyethylene industry -- which admittedly may require some patience -- hold the potential for a strong recovery for Quantum Chemical."
Clarke said that during the industry cycle's 1988 high point. Quantum Chemical had some $760 million of operating profits, compared with last year's $61 million.
"Suburban Propane, too, has suffered from abnormal conditions, such as unusually warm winters which have reduced propane consumption," Clarke said. "A return to normal weather conditions would counteract that trend."
The acquisition is subject to certain conditions, including approval from holders of 66 2/3% of Quantum, Chemical's common stock.
Moody's reacted to yesterday's news by confirming Hanson PLC's and its subsidiaries' long- and short-term debt, and by placing Quantum Chemical's ratings under review for a possible upgrade. Hanson's senior debt is rated Al.
The rating agency's action affects about 3.7 billion of Hanson debt and $2.2 billion of Quantum Chemical's.
In confirming Hanson's ratings, Moody's cited "the group's strong liquidities and its proven track record of managing acquisition debt by improving cash flow of the acquired business units."
The rating agency said, however, that it recognizes "that Quantum may cause Hanson some difficulties as Quantum's operating margins may be under pressure for some time because of the sluggish pace of recovery in the U.S. economy and excess industry capacity for polyethylene."
In secondary trading, aside from Quantum Chemical's issues' sharp rise, the high-yield market ended firm. Spreads on high-grade bonds were unchanged.
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USAir Inc. issued $300 million of 10% senior notes due 2003 at par. Noncallable for five years, the notes were rated Ba3 by Moody's and B-plus by Standard & Poor's. Morgan Stanley & Co. managed the offering. The offering was increased from $150 million.
Exxon Capital issued $250 million of 6% notes due 2005. The noncallable notes were priced at 99.775 to yield 6.026% or 25 basis points over comparable Treasuries. Moody's and Standard & Poor's rate the offering triple-A. Lehman Brothers managed the offering.
Pepsico Inc. issued $200 million of 4.60% medium-term notes due 1996. The noncallable notes were priced at 99.916 to yield 4.63% or 30 basis points over three-year Treasuries. Moody's rates the offering Al. while Standard & Poor's rates it A. Lehman Brothers lead-managed the offering.
New York State Electric & Gas Corp. issued $100 million of 7.45% first mortgage bonds due 2023. Noncallable for 10 years, the bonds were priced at 99.548 to yield 7.488% or 80 basis points over comparable Treasuries. Moody's rates the offering A3, while Standard & Poor's rates it A-minus. Merrill Lynch & Co. lead-managed the offering.
Federal Industries issued $100 million of 10.25% senior notes due 2000 at par. The notes are callable after five years at 103.42 and moving to par. Moody's rates the offering B3, while Standard & Poor's rates it B-minus. Citicorp Securities Markets Inc. managed the offering.
Federal Home Loan Mortgage Corp. issued $100 million of 6.28% debentures due 2003 at par. Noncallable for three years, the bonds were priced to yield 49 basis points over comparable Treasuries. Salomon Brothers Inc. managed the offering.