Ecolab meets expectations, defends Nalco deal

One week after announcing a deal to acquire water services giant Nalco Holding Co., officials of Ecolab Inc. on Wednesday used their earnings conference call to further explain -- and at times defend -- the biggest acquisition in the St. Paul company's 88-year history.

CEO Douglas Baker said the $8.1 billion acquisition is "an excellent deal for shareholders" and emphasized that the addition of Nalco will immediately contribute to Ecolab's bottom line. He acknowledged the cash-and-stock offer amounts to a hefty premium on Nalco's stock price before the deal was announced but added, "We spent a lot of time on due diligence."

Asked to name investors' biggest misconception about the transaction, Baker said it was the notion that Nalco's business could be inconsistent because it of its ties to cyclical industries like oil, energy and paper. Ecolab, known for its cleaning and sanitizing products for the food service, hospitality and health care markets, has a record of steady, strong growth.

"It is not more volatile, Baker said. "Their fundamental business is the same model as ours."

Ecolab shares fell 7 percent when the Nalco deal was announced last week, and the stock has not rebounded. Andy Adams, vice president and investment manager at Mairs & Power, said the decline may also be due to general concerns about the economy and the country's looming debt crisis. "Industrial companies overall have been hit pretty hard in the last couple weeks," he said.

But Adams, whose St. Paul investment firms owns shares in both Ecolab and Nalco, said the deal does raise some questions. He said Ecolab stock historically has carried a higher multiple than Nalco. "I think people are still trying to figure out what kind of multiple the [combined] company will have -- will it be more like Ecolab or like Nalco?"

The transaction isn't scheduled to close until the fourth quarter, but Ecolab included some revised figures on the deal along with its second-quarter results. The combined entity is projected to have 2012 revenue of $12 billion, about twice Ecolab's sales last year.

Earnings totaled $125.9 million or 59 cents per share, down 3 percent over the same time last year. However, excluding one-time gains, charges and tax items, Ecolab had profits of $150 million or 64 cents per share.

Sales of $1.7 billion were up 12 percent over the same period last year and about 3 percent higher than analysts' expectations. The company said it had "solid gains" during the quarter in its United States, Asia-Pacific and Latin American operations, and strong performance from acquisitions. The company's international operations were particularly strong. Sales, after accounting for currency fluctuations and acquisitions, grew 5 percent to $781 million while operating income jumped 26 percent to $71 million.

But higher fuel and raw material costs squeezed Ecolab's profit margins, which were 49.3 percent compared with 50.7 percent in the same quarter last year. The company said the higher costs were only partially offset by price increases and efficiently improvements.

Ecolab last week raised its earnings forecast for the year. Excluding one-time charges and the Nalco purchase, earnings-per-share should be $2.52 to $2.56, up from its previous forecast of $2.49 to $2.53. Last year the company earned $2.23 a share.