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Timing is ripe for Huntsman and Clariant merger
Posted on June 8th, 2017 by Joseph Chang in Chemicals Industry News and Analysis
The time was ripe to strike a merger of equals, with two global specialty chemical companies well into their portfolio transformation plans shedding commoditised assets, with similar goals and valuation multiples, the CEOs of Huntsman and Clariant said on Monday 22 May.
“Opportunities like this are tough to come by,” said Huntsman president and CEO Peter Huntsman on the merger conference call.
“The timing is right, the equity values are right – we need to strike at these sort of times,” he added.
Peter Huntsman and Clariant CEO Hariolf Kottmann had been talking about the possibilities of closer cooperation for eight years but during that period at one time or another, one or both companies were going through major restructurings, acquisitions or divestitures, Huntsman said.
A deal only started to come together about three weeks ago, he added.
There is little product overlap, but rather complementary products serving many of the same industries such as automotive, aerospace and personal care through different platforms, said Huntsman.
The combined companies might be expected to grow possibly 1% to 2% per year faster than either firm could do individually, he added.
“Both companies were not under pressure to do something – not desperately looking for someone to merge with,” said Kottmann.
Clariant decided to combine with a company with similar objectives to reach a new level of capabilities and growth, he added.
The new company, to be named HuntsmanClariant, will have an enterprise value (EV) of about $20bn based on equity prices before the announcement, and sales of about $13.2bn and earnings before interest, tax, depreciation and amortisation (EBITDA) of $1.88bn based on 2016 figures. The EBITDA margin pre-synergy is 14.2%.
It would be tied with Germany’s Covestro for the second largest pure-play specialty chemical company in the world behind Germany-based Evonik, according to the companies.
Synergies, from operational efficiencies and procurement, are projected at $400m/year within two years of closing which is expected by the end of 2017. Including synergies, HuntsmanClariant would have pro forma 2016 EBITDA of $2.28bn and an EBITDA margin of 17.2%.
One area of integration is in Huntsman’s strength in ethylene oxide (EO) production, which Clariant uses further downstream for personal care and other products.
The combination will give Clariant products an increased sales base in North America and the opportunity to expand Huntsman formulation expertise downstream.
The companies expect to expand products into adjacent markets and add broadened end-market exposure through the transaction, they said.
The companies believe that, over the next five to 10 years, the global specialty chemical industry will be dominated by six to eight companies with annual sales in the $14-17bn range.
Globalisation and size were clearly drivers, as well as formulations technology, balance sheet considerations and the enhanced ability to move further downstream.
The advanced scale of the combined companies can be mobilised to enhance growth for all stakeholders, said Kottmann. The larger sales base will reduce cyclicality and provide a larger platform for growth, he added.
“We are convinced that the merger of our two companies will enable us to realise additional margin enhancing opportunities,” he said.
Polyurethanes (PU), coming from the Huntsman side, will be the largest segment of the combined company, comprising 28% of sales and 26% of EBITDA based on 2016 figures. They expect an annual growth rate of 6-9% in PU with EBITDA margins in the 16-18% range.
Huntsman chief financial officer Kimo Esplin expects continued margin expansion in PU from 15-16% in recent quarters, towards the 16-18% target for the next 3 years.
Polymeric MDI volumes are growing at around 7%/year, driven by insulation requirements globally, Esplin said.
HuntsmanClariant will operate in more than 200 production locations. Combined research and development (R&D) spending is $350m. Capital spending (CAPEX) is $600-$650m/year with $200-$250m/year allocated to maintenance CAPEX.
Huntsman’s plan for an initial public offering (IPO) of its titanium dioxide (TiO2) and pigments business Venator is still set for the summer of 2017 and will help bring down the combined HuntsmanClariant leverage levels.
After Venator raises around $700m in new debt, proceeds of which will go to Huntsman, and Huntsman divests the rest of its Venator stake post IPO in stages, the combined HuntsmanClariant’s pro forma net debt/EVITDA ratio would fall from 2.4x, to under 1.5x, giving it plenty of financial flexibility for bolt-on acquisitions in the future, Huntsman said.
By Nigel Davis and Joseph Chang, ICIS
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Global Editor, ICIS
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