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Executive Summary

CHATTEM LOOKING FOR $10 MIL. TO $50 MIL. H&BA LINE OR COMPANY with the proceeds from the sale of its Petrochemicals subsidiary to De Soto, Inc. In a March 8 press release, Chattem announced a tentative agreement with De Soto, a Des Plaines, Ill. chemical coatings and specialty mfr., for the sale of Petrochemicals for $25 mil. and the assumption of certain liabilities. The transaction, to be completed by May 31, "will provide Chattem with an after-tax gain of approximately $3 per share [approximately $7.6 mil.], and will provide funds for possible acquisitions," especially in the H&BA area, the company said. "Chattem, which purchased Love fragrances in 1980 and Quencher cosmetics in 1983, will continue to seek health and beauty product acquisitions. Of primary interest are product lines or companies with sales of $10 mil. to $50 mil.," the firm said. "Chattem will also seek acquisition opportunities which would complement its present line of . . . chemicals manufactured by Chattem Chemicals and sold to the pharmaceutical and proprietary drug industries." Chattem Chemicals supplies aluminum-based antacids for Rolaids (Warner-Lambert), Bufferin (Bristol-Myers), and DiGel (Plough). Financially, Chattem is in a good position to make another acquisition. It has been shifting its corporate profile in recent years without adding significant debt. The firm bought Quencher last March with cash on hand. As a result, the company's long-term debt at the end of 1983 was only $9.4 mil., according to the company's annual report. Cash assets, which were $1.8 mil. at the end of last year, will be boosted with the proceeds from the Petrochemicals sale. In addition, the divestiture of the Nadinola skin care line last July resulted in a pre-tax gain of over $1.5 mil. As an indication of the major restructuring planned at Chattem, the Petrochemicals div. being divested represented almost 30% ($25 mil.) of the total corporate sales last year ($85 mil.). If the firm finds an H&BA line with $50 mil. sales to add, it will be adding a business which will nearly double its total annual volume. The combined operating earnings for Chattem's Petrochemicals and Chattem Chemicals units were off 31% in fiscal 1983 primarily due to decreased profits from Petrochemicals. Profits from the subsidiary remained at low levels for the first half of 1984 despite a 15% gain in revenues, Chattem noted in a recent second quarter financial report. Commenting on its Health & Beauty Products Group, Chattem said it continues to devote "significant" amounts to advertising and promoting lines including the Premesyn PMS and Pamprin menstrual relief products, Corn Silk makeup and Quencher. The company estimated spending for 1984 will total $24 mil., representing a nearly 50% increase over 1983. That boost follows 31% and 17% increases in spending for advertising in 1983 and 1982 respectively. Chattem said it expects the heavy investment spending will be a drain on operating profits for consumer products in 1984, but will pay off in 1985.

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