Hanson pays dollars 3.2bn for US chemical group: 'We would rather get in while there is still value at an attractive price than wait for this train to leave the station'

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The Independent Online
HANSON resumed its love affair with troubled industrial companies yesterday, paying dollars 3.2bn ( pounds 2.1bn) for Quantum Chemical, a US polyethylene and propane group laid low by heavy debts and slumping prices.

Hanson will issue dollars 720m worth of American depositary receipts to pay for the deal and assume the dollars 2.5bn junk-rated debt that Quantum took on four years ago to prevent a hostile takeover bid. Quantum in effect wiped out its net worth in that deal, using the money to pay its stockholders a dollars 50-a-share special dividend and finance a dollars 1.6bn expansion in its polyethylene capacity.

The highly cyclical market for the plastic - used to make rubbish bags and milk containers - has been depressed ever since, and Quantum, as the largest US maker, has been struggling to meet its onerous debt- repayment schedule.

Hanson was confident it was buying Quantum at the bottom of the industry's cycle and would gain from an upturn in demand as early as next year, which should have a dramatic effect on the company's earnings. While Quantum had an operating profit of only dollars 61m on sales of dollars 2.5bn last year, it made dollars 760m from plastics alone in 1988.

Analysts estimate that if the polyethylene price rose by 1 cent a pound, then dollars 35m - or about 85 cents a share - would be added to Quantum's earnings. Demand for the plastic was growing this year at about twice the rate of US gross domestic product, slowly reducing the inventories and overcapacity that have hurt Quantum and rivals such as Dow Chemical, Union Carbide and Exxon.

Quantum's earnings from its propane gas division - about a quarter of total sales - have also suffered as a result of two abnormally warm winters in North America, according to Hanson.

'We know that patience is required here,' said David Clarke, chief executive of Hanson's US arm. 'But we would rather get in while there is still value at an attractive price than wait for this train to leave the station.'

The Quantum deal appears to fit the mould of many other recent Hanson acquisitions - a timely purchase of a struggling basic commodity business just as it is about to turn a corner. Hanson should also be able to slash the cost of servicing Quantum's debt, much of which is still at interest rates of well above 10 per cent.

Analysts said that Quantum, which has lost about dollars 325m in the past two years, had only been able to meet its dollars 260m annual interest bill because of loss-related tax refunds and, last year, a dollars 55m insurance payoff from a fire at one its plants in 1989. It is scheduled to begin repaying principal on its debt in 1996. Hanson believed it could make savings of dollars 125m in borrowing costs in the first year alone.

Derek Bonham, Hanson's chief executive, said that Quantum's operating profits would benefit this year from cost cutting and other actions already put in place by local management. A dollars 1.65bn 'world-class' ethylene plant at La Porte, Texas, had overcome start-up problems and was running at capacity. Quantum's dollars 40m-a-year corporate headquarters in New York is moving to Illinois.

In London, analysts reacted positively to the Quantum deal and Hanson shares closed 5p higher at 227.5p. 'It is a typical Hanson deal and super for sentiment' said Christopher Alexander, of Lehman Brothers.

The acquisition would add substantially to Hanson's SCM chemicals business, bringing annual turnover to about dollars 2.7bn. Hanson's overall US sales would now be about dollars 10bn - 55 per cent of the group's total. The 25,000 Quantum shareholders taking Hanson stock would raise the US proportion of Hanson shareholders to about 27 per cent.

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