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Westlake finally lands Axiall acquisition
Posted on June 28th, 2016 by Matt Weber in Chemical Manufacturing Excellence
Westlake Chemical has agreed to acquire Axiall Corp. for $3.8 billion, continuing record-setting year in chemicals industry M&A.
This is Westlake’s largest acquisition, following their $533 million 2014 acquisition of German-based PVC producer Vinnolit Holdings GmbH (a subsidiary of Advent International). The acquisition of Axiall will make Westlake the second-largest PVC producer in North America, and the third-largest in chlor-alkali. Westlake’s acquisition strategy follows a chemicals M&A trend of specialization with regard to product/marketing, mix with the objective of becoming market leader in their segment.
By Joe Chang, ICIS
US-based Westlake Chemical has finally sealed the deal to acquire polyvinyl chloride (PVC) producer Axiall to create the No. 2 player in North American PVC and No. 3 in chlor-alkali. Its $33/share, or $3.8bn, offer has been accepted by the Axiall board.
Westlake paid up to get the deal done. Its initial unsolicited offer in January was $20/share, which was then raised to $23.35/share in April. Both offers were a combination of cash and shares where the last accepted bid was all cash.
South Korea’s Lotte Chemical – Axiall’s joint venture partner in their planned US ethane cracker – made a reported bid of over $2.6bn for Axiall in June, which was subsequently dropped days later as it cited the “difficult situation that Lotte has faced in Korea recently”, along with heated competition.
Lotte Group is being investigated by South Korea’s government in a corruption probe.
There’s little doubt the Lotte bid lit a fire under Westlake to make a decisive move. Lotte’s bid was believed to be in the $25-30/share range, according to Hassan Ahmed, analyst with Alembic Global Advisors.
If completed as expected in the fourth quarter of 2016, the $3.8bn deal (including the assumption of about $1.4bn in Axiall debt) would bring a number of benefits to Westlake – greater scale, cost and growth synergies, a better balance between its olefins and vinyls businesses, and ultimately earnings accretion.
Combined, the companies should have more options to achieve a greater level of back integration into ethylene.
Despite Cowen analyst Charles Neivert’s darkening outlook for the US commodity chemicals sector on higher expected demand for natural gas liquids (NGLs) and weakening pricing power in olefins, he remains positive on Westlake because of the pending Axiall transaction.
“Based on our outlook for Axiall, we see 2017 EBITDA [earnings before interest, tax, depreciation and amortisation] of around $500m (excluding synergies) which includes the remaining Building Products business as well as all of the vinyl chain and chlor-alkali facilities,” said Neivert in a research note.
“In addition, we believe that Westlake may be able to find synergies beyond the $100m identified in the transaction announcement,” he added.
With Neivert’s cash flow projection, the $3.8bn deal would be at a very reasonable multiple of 7.6x estimated 2017 EBITDA, a far cry from the headline 12.1x last 12 months adjusted EBITDA of $313m for Axiall.
Westlake itself is spinning the deal multiple at “6.1x Axiall Cycle Average Adjusted EBITDA”, including expected synergies, as it looks across the chlorvinyls cycle.
Cowen’s Neivert sees 50% higher synergies of $150m in the combination, and significant earnings accretion for Westlake.
The analyst sees the deal being accretive to Westlake’s earnings per share (EPS) by $0.64 in 2017. However, this will not be enough to halt an expected profit decline on market factors.
He expects Westlake to earn $3.59 in 2017 – a drop from an expected $3.90 in 2016 and $4.54 in 2015.
Westlake will become more earnings balanced in its two product segments after the Axiall deal. In 2015, Westlake’s olefins segment posted $747m in operating income versus $254m for the vinyls segment.
And as the ethylene cycle is expected to turn down in the coming years with a wave of new capacity coming on in the US, the chlor-alkali/PVC cycle is expected to turn up as little new capacity is added.
The combined Westlake/Axiall would be No 2 in North American PVC behind Shintech and No 3 in chlor-alkali behind Olin and Occidental Chemical, noted Westlake. Combined PVC capacity would be around 2m tonnes/year with chlor-alkali capacity at about 2.5m tonnes/year in Westlake’s presentation on the deal (based on approximate appearance on bar charts).
Getting that kind of balance in the portfolio with the right timing would be a rare feat in the commodity chemicals industry.
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All opinions shared in this post are the author’s own.
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