$ENTG buying $CCMP: Frankly a bit disappointed

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In my original post on Entegris stock, I mentioned “there actually is a second player as well I am reviewing, but haven’t gotten fully comfortable yet.” That player was CMC materials, or $CCMP. I have followed CCMP for many years but it was run somewhat like a “public” private equity fund. Unfortunately, those rarely work out unless you are a titan in Omaha.

CCMP had wood treatment businesses (which they are exiting), electronic chemical businesses, and then bought a business that reduces drag in oil and gas pipelines. There didn’t seem to be much overlap.

That said, I did think the semiconductor tailwinds would lift CCMP and it was optically cheaper than Entegris stock. I didn’t pull the trigger though and now CCMP is getting acquired for ~17.5x (historically traded around 10-11x) and it’s about a 35% premium. ENTG buying CCMP for $133/share in cash and 0.4506 ENTG shares, or ~$197.50/share total consideration (vs. $146/share the day before announcement). And even outside of this M&A take-out, I have been wrong to not pull the trigger on the name.

Entegris says this will complete their product offering, diversify them a bit, but offer a better package to their customers. It will help them reach their customers in more ways as architectures change, become more complex and manufacturers need to increase yield. It may also help them innovate to meet these challenges.

So why am I disappointed?

From my understanding, the etching and slurry chemicals, as well as the pads, that CCMP sells are much less complex and more competitive. The “secret sauce” isn’t that secret. DuPont is the competition here. So sure, the rising tide might lift all boats, but does Entegris actually need this?

In fact, it actually made me wonder if I am missing something in Entegris. Entegris previously tried to tie-up with Versum, but the the deal was shot down and Versum was taken out by Merck (which was odd too). Why is Entegris “desperate” to do a deal?

Let me be clear – this is paranoia on my front. Entegris has executed phenomenally, but file it under “things that make you go hmmmm.”

To sum it up, I have Entegris doing a deal that seems dilutive from a technology perspective and I have CCMP that was buying and O&G pipeline chemical business just a few years ago and now they are tying up??

Even the answer on the call left much to be desired:

ENTG commenting on CCMP acquisition rationale

I’m staying long $ENTG and think this is a positive, multi-decade story. That said – I understand why Entegris stock is down ~5.5% at the time of writing! The company will also be 4x levered at deal close. They should sell some of the non-core assets within CCMP, but we will see. Whenever a company gets above 3.5x leverage in public markets, volatility follows. As readers know, I love good company / bad balance sheet set-ups. So we shall see!

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