Orica Ltd (ASX: ORI) announced some big news this week: it had settled a major litigation in the US and would also forge ahead with a related acquisition.
Macquarie has had a look at the impacts of this and still retains a bullish price target on the stock, but we'll get to that later.
Firstly, let's look at what Orica announced this week.
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Simplifying the business
The major chemicals and explosives company said it had settled litigation with CF Industries for US$169.5 million, "following careful consideration of the best interests of shareholders and customers''.
The company said the settlement removes litigation uncertainty and also allows it to establish a new, diversified supply base in the US.
The settlement will be funded from existing cash and undrawn bank debt facilities.
Orica also reached an agreement with its joint venture partner, Nelson Brothers, to acquire its explosives business for US$25 million, plus the retirement of US$48 million in debt.
Orica said it expected the combination of the legal settlement and the company acquisition to be earnings per share accretive in the first full financial year of ownership, and that the US business would be simplified, with growth potential and greater operational resilience.
The acquisition is expected to boost EBIT by about $35 million per year once fully integrated, "with further opportunities to grow revenue and realise additional business cost synergies''.
Orica Managing Director Sanjeev Gandhi said:
Orica has agreed to settle this litigation with CF following careful consideration and in the best interests of shareholders and customers. Our focus remains on executing our strategy, advancing our growth initiatives and delivering sustainable value for customers and shareholders. Importantly, our actions have ensured there has been no disruption to customer supply, and we remain committed to strengthening security of supply for our customers through a diversified and resilient sourcing strategy in North America. The combination of the settlement and the acquisition of Nelson Brothers' US Explosives business will further strengthen our North American region, deliver immediate earnings benefits and support our strategy to grow in attractive downstream markets.
Orica shares looking cheap
The Macquarie team ran the ruler over this week's transactions and said the settlement removed litigation overhang, estimating that legal action had cost the company $100 million over the past two years.
Macquarie has reduced its price target on Orica shares slightly from $25.50 to $25.40 on minor earnings per share changes; this is still well above the current share price of $19.63.
If achieved, the Macquarie price target would constitute a 29.4% gain, and Orica is also expected to pay a 3.2% dividend yield.
Orica was valued at $8.99 billion at the close of trade on Monday.
