Ecolab to Divest Vehicle Care Unit

In an effort to streamline its business operations, Ecolab Inc. ( ECL - Analyst Report ) has agreed to sell its Vehicle Care division to Atlanta, Georgia-based Zep Inc. ( ZEP - Snapshot Report ) for roughly $120 million in cash. The divestiture is expected to close by year end.

The Vehicle Care division is an operating unit under Ecolab’s U.S. Sanitizing and Cleaning Segment (43% of total revenues). In 2011, revenues from Ecolab’s Vehicle Care division came in at $66 million, accounting for 2% of the US Sanitizing and Cleaning Segment revenues while adjusted EBITDA was $13 million.

Ecolab asserts that as a concern which is a leading provider of cleaning and maintenance solutions to industrial, commercial, institutional and consumer end-markets, Zep is a well aligned buyer for its Vehicle Care division. While acquisitions remain Ecolab’s aggressive strategy to accelerate growth over the long haul, the Vehicle Care divestiture also appears to be a strategic fit in its effort to sharpen its focus on core operations.

Earlier this month, Ecolab agreed to acquire privately-owned Champion Technologies and its related company Corsicana Technologies for $2.2 billion, in cash and stock. This will be Ecolab’s biggest acquisition since the company acquired Nalco in 2011 in a cash and stock deal worth roughly $8 billion.

The acquisition of Champion Technologies will strengthen its foothold in the energy market. The proposed acquisition will beef up Ecolab and help the company benefit from the potential represented by one of the fastest growing industries in the U.S. Following the closure, the company is slated to become a giant in the oilfield chemical business.

As the company gains competitive advantage and makes headway in the energy market, the divestment of its under-performing Vehicle Care division will enable the company to direct resources and focus on high growth avenues.

Since deleveraging remains a looming concern for Ecolab with a long-term debt of $4,879.2 million and a $1.7 billion cash payment for its latest acquisition, the sale of its Vehicle Care division will garner additional funds for the company. Ecolab exited the second quarter with cash and cash equivalents of $304.9 million, up 86.8% from the previous-year quarter.

The company’s strategy of acquisition and divestment should yield positive results in the years ahead. The news regarding Ecolab continues to display its strength in pursuing its strategic initiatives as reflected in the bullish momentum of its stock price. Shares of Ecolab reached a new 52-week high of $70.75 on October 17, 2012.

We currently have a long-term ‘Neutral’ recommendation on Ecolab.