LSB Industries, Inc. (NYSE: LXU) has completed the sale of its Climate Control Business (CCB) for $364 million to Sweden’s NIBE Industries. But where is the company channeling the proceeds? It is not new asset acquisition or shares repurchases, but paying down outstanding debt.
LSB Industries, Inc. (NYSE: LXU) revealed that the net proceeds from the sale of the climate control business will be used to strengthen the balance sheet. Toward that end, the management has identified repayment of outstanding debt and redemption of preferred stock. But LSB Industries could also pay down debt and retire the preferred stocks at the same time if the funds are enough.
However, management of LSB Industries didn’t provide an estimate of the expected net proceeds considering that the $364 million from the sale of CCB is gross proceed.
Is the $364 million price justified?
According to LSB Industries, Inc. (NYSE: LXU)’s CEO, Dan Greenwell, one of the exciting things about the transaction to sell CCB is that they managed to negotiate an attractive valuation for the asset.
What is the debt position for LSB Industries, Inc. (NYSE:LXU)?
LSB Industries, Inc. (NYSE: LXU)’s balance sheet as at the end of 1Q2016 showed cash and equivalents totaling $39.5 million, while total debt stood at $534.9 million. A closer look at LSB Industries’ balance sheet reveals that while cash balance shrank from $127.3 million in the prior quarter, debt ballooned from $529.5 million in the prior quarter. Therefore, it is reasonable that the management is planning to use the proceeds from the sale of CCB to reduce balance sheet leverage.
The CEO Greenwell left no doubt that the sale of CCB will improve LXU’s capital structure and improve balance sheet flexibility.
What changes with the unloading of CCB?
Besides the direct financial boost from the sale of CCB, LSB Industries said that eliminating the business will also simplifying its operating structure. Specifically, LXU will now transform into a pure-play chemical company. It is possible that the company will also drop some costs with the removal of CCB.
In 2015, CCB generated revenue of $274 million and EBITDA of $25 million. But in 1Q2016, LSB Industries, Inc. (NYSE: LXU) generated consolidated revenue of $165.6 million, which declined nearly 15% YoY but still managed to exceed the consensus estimate by $6.42 million. EPS in the latest quarter was $0.47, missing the consensus estimate of $0.64.