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Leading cleaning and sanitation products maker, Ecolab Inc. (ECL - Analyst Report) recently announced that it will be offering 1.450% senior notes due 2017 for an aggregate purchase price of $500 million. Ecolab anticipates the offering to be completed by December 13, 2012, subject to certain customary conditions.

The net proceeds will be used primarily to fund a portion of the cash payments to be made for the recently announced acquisition of Permian Mud Service, Inc., the parent company of Champion Technologies and Corsicana Technologies.

In October 2012, in an effort to expand its Global Energy Services franchise, Ecolab agreed to acquire privately-owned Champion Technologies and its related company Corsicana Technologies. Earlier the deal was for $2.2 billion, to be paid in cash and stock. However, recently in December 2012, the company altered the agreement. Consequently, the value of the transaction has been revised to $2.16 billion.

The decision to acquire Champion within a year of the Nalco acquisition (for roughly $8.3 billion) in December 2011 strengthens the company’s energy business in North America. Following the closure, the company is slated to become a giant in the oilfield chemical business.

The deal is expected to close by the end of 2012, subject to standard closing conditions and regulatory clearance. Although both the companies are aggressively working together, management at Ecolab did not provide any assurance that the transaction will be completed within the stipulated time frame, or at all.

In case the deal doesn’t run through, Ecolab might use all or a portion of the net proceeds for general corporate purposes. The company can also use the proceeds along with additional funds, if required, to fund the special optional redemption of the notes.

Earlier, in August 2012, Ecolab announced that it had completed its public offering of $500 million of 1.000% senior notes due 2015. The company utilized the net proceeds from the offering to payback a portion of its outstanding commercial paper borrowings and for general corporate purposes.

Ecolab’s debt-to-capital ratio at the end of the third quarter of 2012 was 50%. Following the completion of the offering, the new ratio will be 52%.

Moreover, net interest expense in the reported quarter was $64.2 million. Given Ecolab’s strong cash balance, we believe that the company will be able to meet its interest obligation. The company exited the third quarter of 2012 with cash and cash equivalents of $324 million, up 56.3% from the previous-year quarter.

Over the last twelve months the debt burden of the company has increased substantially, with its long term debt increasing seven times to $5,386.7 million, majority of which is directed to fund acquisitions. Despite the increase in debt level we believe that its financial position is strong enough owing to the steady top-line growth and strong cash flow.

St. Paul, Minnesota-based Ecolab serves the food service, food and beverage processing, healthcare, energy, water treatment and hospitality markets in the U.S. as well as internationally. Although we are impressed by Ecolab’s strong international exposure, we remain cautious about currency fluctuations and aggressive competition from the likes of The Clorox Company (CLX - Analyst Report) and Church & Dwight Co. Inc. (CHD - Snapshot Report).

We currently have a ‘Neutral’ recommendation on Ecolab. The stock carries a short-term Zacks #3 Rank (Hold rating).
 

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