LENS Letter to Ashland Inc.

April 24, 1997

Paul W. Chellgren
President and Chief Executive Officer
Ashland Inc.
P.O. Box 391
Ashland, KY 41114

Dear Paul:

Thank you very much for taking the time to discuss in detail a number of issues during our April 9 telephone conversation. I know that you are extremely busy, so the gesture was deeply appreciated.

It is clear that you are prepared to make substantial, well thought out changes at Ashland in order to re-make the company into a more focused, marketing-based concern, changes which we feel should add value for the shareholder. We appreciate your strong identity of interest with us as well as with other outside owners.

We think that a potential strategic alliance, such as has been rumored between Refining & Marketing and Marathon, will be a good move given current industry dynamics. We are confident that you will seek to structure any alliance so as to both improve profitability and viability in the short run, and to provide for fair profits and a timely exit in the near future. While we acknowledge that for some, this is a business worth being in, we respect your comments that for Ashland, it is the business segment with the least appealing prospects.

Regarding Exploration, we appreciate your effort in considering bona fide purchase offers, rather than just proceeding with the announced spin out.

We can see that a "core" Ashland¾ which would be a marketing-based concern using hydrocarbon derivatives with existing trade names¾ is a company that would make sense to the market. It might well be accorded a higher multiple than Ashland has currently, while returning more to shareholders on a lower capital base.

As with you, we have intellectual difficulty seeing how the Construction business belongs in this new core, and look forward to a further assessment of its place in Ashland. Given our current understanding, we hope for its divestiture. You noted that potential divestiture is encumbered by a relatively low tax basis, and that such a company might be accorded a low P/E (10x - 12x). We think that the tax basis problem could be avoided with a spin-off. We also think that independence creates its own benefits, and that this, coupled with Construction’s current strength in its industry, would indicate a P/E multiple closer to the 13x - 15x range. This would indicate a value of $660m to $770m (with $75m of debt going with the spin-off).

We applaud the success represented by the Arch Coal merger. The low tax basis probably complicates your feelings towards the Coal business, but hope that you make it a priority to exit this business once conditions improve, both within and without, over the next couple of years.

Finally, it does not appear as if your vision of an Ashland revolving around a new core has been fully understood by the street. You have a great story to tell, and we think that you should feel free to communicate it often.

We look forward to further positive discussions with you, and to further favorable news.

Sincerely yours,

John P. M. Higgins
Principal
LENS, Inc.