Monday, May 01, 2006

BASF Extends Bid for Engelhard to June 5th

Engelhard's(EC) attempt to elicit a higher bid for the company appears to have failed. BASF (BF) extended its offer for a fifth time, now to June 5th.

In fairly stern language, BASF indicated that it would abandon its takeover plan if it fails to win the support of shareholders.

"If Engelhard's shareholders don't vote in favour of our nominees, we will allow
our tender offer to expire on June 5 and turn our attention to other
opportunities," BASF Chief Executive Juergen Hambrecht said in the statement.

Despite the efforts of the last several months, EC management by its recent admission, was unable to find another higher bidder for the company. Consequently, it introduced its recapitalization plan to buy back 20% of the company.

Unfortunately, given the augmented leverage that would result from the takeover, and what appeared to be little effect on near-term earnings growth, I believe that this would result in a lower value for the remainder of EC's outstanding shares.

If BASF choses to walk away, the downside in Engelhard could be material at least short-term. Remember, with 40% of its sales tied to automotive catalysts, in some ways EC can be perceived as a quasi-auto parts company. However, longer term, the now global quest for clean air should continue to propel demand for catalytic converters throughany down cycle. In particular, the increased regulation for catalytic converters in heay-duty diesels should provide a growing market for these products.

Disclaimer: I, my family, and clients do not have a current position in Engelhard. I, my family, and clients do have a current position in BASF.


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