J.P. Morgan Comments On Berkshire Hathaway's Acquisition Of Lubrizol

In a report published by J.P. Morgan, Lubrizol (NYSE: LZ) is to be acquired by Berkshire Hathaway and the price target is increase to $135 from $117.

J.P. Morgan said that it believes that it is worthwhile to place the Berkshire proposal to acquire Lubrizol into longer- and shorter-term contexts for the purposes of understanding and assessing the value of chemical equities generally. “Purchases of chemical companies by nonchemical companies, broadly defined, are unusual, although Berkshire has done it before. We understand the current offer for Lubrizol by Berkshire as comparable to its 2001 purchase of Benjamin Moore Paints for 7.0x EBITDA. Both businesses generate good free cash flow, participate in consolidated industry structures, and have pricing power: The pricing power has been demonstrated in paints over a longer period and in lubricant additives over a shorter period. Consumer franchises over time have been diminished by the strength of the large retail chains. Industrial franchises, by contrast, have been enhanced by consolidation of industry structure, extensive rationalization of overhead, effective ERP systems, product technology innovation, and global growth opportunities.”

Lubrizol closed yesterday at $134.68.