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Industrial Gas Companies Face Brazilian Fine Muito Grande
The Brazilian antitrust authority, Conselho Administrativo de Defesa Econômica (CADE), is levying fines totaling about $1.7 billion against Air Liquide, Air Products, Linde, Praxair’s Brazilian subsidiary White Martins. It has also implicated seven managers of those companies.
CADE says it found evidence, through wire taps and searches, of an elaborate arrangement to divvy up the market by assigning customers to particular industrial gas companies.
“CADE understands the actions of those companies that were investigated resulted in grave damage to industry and the public health of Brazilians,” the regulator said in a statement. (Warning: I translated that myself.)
White Martins faces the largest fine, $1,273 million. Air Liquide is on the hook for $143 million. Air Products is looking at $130 million. And Linde may be responsible for $137 million.
The fines made Praxair mad. “Praxair strongly believes that the allegations of anticompetitive activity against our Brazilian subsidiary are not supported by valid and sufficient evidence,” the company said in a statement. “We further believe that the fine represents a gross and arbitrary disregard of Brazilian law.” The firm promises that it will “prevail on appeal.”
To Laurence Alexander, an equity analyst that covers Praxair for Jeffries & Co., the fine isn’t a shocker. “The threat of potential sanctions has been apparent since 2004, when CADE announced an investigation into alleged price fixing on public tenders as part of a broader government initiative to ‘help tame inflation’,” he wrote to clients. Alexander expects appeals to drag out five to ten years.
PotashCorp/BHP Billiton Turns Into a Brawl
Yesterday, Potash Corporation of Saskatchewan sent out a letter to customers in which it talked a little trash. A little background: BHP has been buying up mining rights in Saskatchewan to develop a greenfield potash mine. There is nothing that PotashCorp executives like more than to talk about how expensive the BHP mine would be.
Here are the good bits of the letter:
We recently learned that Chris Ryder, director of potash marketing for BHP Billiton, has begun to cold call many of you. Since the purpose of BHP Billiton’s call clearly was not to solicit your potash order from BHP Billiton’s Jansen project—a multi-year Greenfield project which BHP is not even proposing to take to its own Board of Directors for approval until 2011—we consider this contact to be inappropriate and highly unethical. We can only assume that BHP Billiton’s purpose is to sow seeds of doubt and confusion about the future of PotashCorp by raising questions about our ability to do business across the nutrient spectrum as well as the future location and makeup of our sales organization.
I am a little bewildered by BHP’s motives here. Chris Ryder is sitting at his desk wondering how BHP can buy PotashCorp without raising its bid too much. He decides the best course of action is to start calling PotashCorp.’s clients? I don’t see how that kind of thing can help. Due diligence, perhaps? It’s really hard to tell because we are getting this second hand from PotashCorp.
Maybe it implies BHP would sell off PotashCorp’s non-potassium containing fertilizers.
Ryder is no low level rogue employee. Most recently, he was marketing director for diamonds at BHP. Perhaps he does have good reasons.
What’s The Airgas Shareholder’s Motivation?
Since I found out that 23.2% of Airgas’ shares have been tendered to Air Products at $63.50 per share, all while the market price for these shares have remained above $65, I have struggled with a question: Why would someone want to offer their shares for sale at less than the prevailing price?
Now, suppose I had been an Airgas shareholder before Air Products’ $60 per share offer was disclosed back in February. Let’s say I purchased my shares at about $40 or so. I would have sold my shares immediately on the news to lock in a tidy profit. I wouldn’t want to risk that profit for a measly $2 or $3 gain later on.
The people that I would be selling my shares to would be deal arbitrageurs, often referred to as “arbs”. They earn their money specializing in buying stock of companies that have just announced deals. They hold onto their shares until the deal is consummated. For example, let’s say Company X’s shares are selling for $20 per share. It announces an agreement to be purchased by Company Y for $30 per share in a deal that is expected to be consummated in several months.
Shares in Company X will immediately jump, but not likely to $30, but rather to something like $27 or $28 per share. This is because there is always uncertainty about whether the deal will actually get done. Regulators could block the deal, Company Y would still need to do some due diligence, economic circumstances could change, and any number of other factors could scuttle the transaction. Arbs, who are deft at gauging the deal tea leaves, will happily take on the risk to make that $2 or $3 when Company Y’s purchase of Company X is completed.
This gets us back to Airgas. These arbs have been buying up the shares at above Air Products’ offer prices. They can only make money if Air Products comes in with a higher offer. They will lose a lot of money if Air Products walks away. So what do the arbs want? They want Airgas to sit at the negotiating table with Air Products to hammer out a transaction that will earn them a profit.
This might explain why they have been tendering their shares. Airgas has an annual meeting in September in which three Air Products nominees can be elected to its board. It can also be forced to hold its next annual meeting in January, which would further expedite Air Products’ board stacking. A tender can indeed be withdrawn. The arbs don’t have to ultimately sell their shares for less than what they paid for them if they don’t want to. Tendering their shares, albeit temporarily, lets Airgas’ management know that Air Products might have some support going into the annual meeting. It is a signal that they want to see the two parties come to terms.
Is Ashland Distribution Up For Sale?
Ashland Distribution divestiture talk has been heating up in recent weeks. According to a Reuters report, the company is consulting with investment bankers to sell the unit, which may fetch about $500 million.
An Ashland distribution center.
The unit has long been regarded as one that Ashland would be willing to part with. CEO Jim O’Brien has been transforming Ashland into more of a specialty chemical company. It sold off its 38% stake in Marathon Ashland Petroleum in 2005 for $3.7 billion. It divested its paving and construction unit a year later for $1.3 billion. And in 2008, it purchased Hercules for $3.3 billion.
The company isn’t cash strapped, but with the new focus, businesses like distribution and Valvoline fit more uneasily in the company’s portfolio than they used to. But Valvoline generated 60% of Ashland’s operating profits in 2009 on 20% of its sales. Those are the kinds of businesses that a company seeks to duplicate with portfolio reshuffling, not sell off to buy businesses that won’t earn as much. Distribution, meanwhile generated only 12% of the company’s profits on 37% of its sales. Ashland can probably do without a business that generates a 1.7% operating profit margin.
The rumor also makes sense because there is a lot of action now in the chemical distribution sector. Brenntag raised $900 million in a public offering in April. Univar wants to raise nearly that much with an upcoming IPO.
Ashland has been very quiet on the matter. According to Laurence Alexander, an analyst that covers Ashland for Jeffries, O’Brien told a Jeffries investor conference in New York that the unit was a non-core business.
I believe Alexander, but I really don’t know what O’Brien’s specific wording was. There was never any audio available to the public for me to confirm the statement independently.
I called Jim Vitak at Ashland PR. He offered the customary response to rumors. “We don’t comment on marketplace rumors and speculation,” he said.
Vitak then walked back the divestiture talk a bit. He wouldn’t confirm O’Brien’s statement before the conference. (That’s unusual. Normally companies fess up when the CEO says something in front of a room full of people or deny it if they didn’t say anything.)
Vitak even argued against a divestiture. “There has been talk out there for several years off and on,” he said. He added that there may have been times when the unit “needed work” but that “work has been put in”. Ashland also, according to Vitak, reached its targeted debt levels and can attain its near term profit goals without a divestiture.
One can only guess as to why the company is being so secretive. Companies do get a little mud on their faces when they can’t sell a business. Rumors of a sale might also be bad for morale at the distribution unit.
Words Have Meaning
Posting has been a little thin here on the Chemical Notebook. In August, Europe goes on vacation and so do I and the rest of the business department here at C&EN.
It has been a brisk news week. And I will soon share a few tidbits that I picked up that couldn’t get into the magazine about Ashland and Potash Corporation of Saskatoon, Saskatchewan.
However, the business of the day is the word. And that word is “TO”.
Dow Throws Cold Water On Coal
The talk of the chemical town this week was Dow Chemical’s Q2 earnings. The company’s 54 cents per share—excluding unusual items—fell a little short of the 56 cents that Wall Street was hoping for.
Wall Street doesn’t like being disappointed, especially in a good earnings season when other chemical companies are overshooting forecasts. Investors chased Dow’s shares down Exchange Place and beat them up with tire thumpers. On August 3, the day of Dow’s announcement, shares closed down 11% versus August 2, to $25.50.
With the earnings, Dow officially admitted it is moving its project with Saudi Aramco from Ras Tanura to Al Jubail. Rumors saying as much have been around since early spring. Dow says it will wrap up front end engineering in 2011.
It seems like the company would rather use existing infrastructure in Al Jubail rather than start from scratch in Ras Tanura. I wonder if it is being scaled down with the change in venue. Back in 2007, estimates for the construction were running as high as $20 billion and Andrew Liveris was promising it would be the “The Freeport, Texas, of the emerging world.”
In the conference call, Liveris said propylene oxide and epichlorohydrin were part of the project slate. Dow was saying as much back in 2007. During the conference call he also mentioned acrylic acid. That might be a sign that its acquisition of Rohm and Haas is influencing the scope of the project.
One Liveris statement from the conference call worth parsing is this:
“We’ll get the Aramco project, the Jubail project, up and running in the mid-part of the decade, and the China project will come in the latter part of the decade.”
There is nothing surprising about the Aramco project timing. Four to five years after engineering is completed is a reasonable timeframe for a project of its magnitude in Saudi Arabia, which has a good track record for getting energy and chemical projects done.
Dow has been talking about the Aramco complex since about 2006. One can call a mulligan on the delays. A little birdie once told me that the Saudi’s weren’t particularly enthusiastic about Dow’s proposed—and subsequently failed—attempt to sell the half of its commodity chemicals business to the Kuwaitis. That might have slowed the project a little. And Rohm and Haas and the financial downturn certainly did as well. If Dow does get the project off in less than ten years after it first talked about the project publically, that would be a solid accomplishment.
The other part of Liveris’ remark was about its proposed coal-to-chemicals project with Shenhua in Shaanxi Province, China. He was basically telling analysts not to expect that project before 2020. It’s 2010. That’s a long time to have a project cryogenically frozen.
Lubrizol CEO Admits He Scared ‘The Bejeebers’ Out Of Analysts
And the award for outstanding achievement in the field of leveling with analysts goes to James L. Hambrick, CEO of Lubrizol.
During his prepared remarks during Lubrizol’s Q2 earnings conference call, he told analysts that he didn’t want to talk about his company’s bidding war with BASF to buy Cognis by, well, saying much more about the failed takeover attempt than any other CEO would spend talking about a failed takeover attempt:
“I have nothing I can tell you in terms of portfolio enhancements. We’re going to continue to work that space. Some of you may want to talk about the Cognis acquisition, I don’t intend to spend any time on that this morning. We were not successful, it was a large deal, I know it scared the bejeebers out of some of you, but it’s not very often that you could put together a bolt-on in personal care, in coatings, and in the industrial space. The only thing that was really wrong with it was it all came at us at one time and we weren’t successful.”
BASF inked a deal in late June buy Cognis for $3.8 billion. There were many leaks about the negotiation process before the deal was announced. Lubrizol supposedly had a bigger offer on the table, but the financing wasn’t as ironclad as BASF’s.
As far as the scaring the “bejeebers” out of analysts goes, Lubrizol only has about $4.8 billion in revenues in 2009, making a $4 billion acquisition rather steep. Big acquisitions normally transform companies, but often into debtors-in-possession.
However, Lubrizol did rack up $500 million in earnings from those revenues, not a bad record in a recessionary year. And let us not forget that when Lubrizol bought Noveon in 2004, it had about $2 billion in sales while Noveon had about $1.2 billion.
Hambrick says Lubrizol isn’t out of the hunt:
“We’ll move on, we have other assets that we’re looking at, other opportunities. I’m working at it full-time even as during the course of this week and will continue to work that. Our first priority is to invest in the business to sustain it and keep it moving. Our second priority really is what I would call the duet of portfolio enhancements and share repurchases. It’s the proper use of our cash balance for the benefit of shareholders.”
Odds are he won’t find a purchase that will push all of Lubrizol’s buttons like Cognis would have.
Thoughts On An Iranian Explosion
According to the Iranian News Agency, there was an explosion at a petrochemical plant in Kharg that killed four workers on Saturday. The accident, according to the report, was set off by high pressure in a central boiler. A Reuters report, citing a local governor, agreed on basic details but fingered a gas leak for the blast.
Iran’s National Petrochemical Co. has ambitious plans to develop the sector involving the construction of dozens of interconnected world-scale petrochemical plants. If that wasn’t enough, NPC buys designs from foreign engineering firms, but undertakes the construction all by itself. Partly this is due to sanctions against Iran; partly it is because one of the objectives of its development program is to create domestic capabilities for sophisticated engineering.
The complexity of the development project plus the go-it-alone approach has led to countless delays and troubles for the Iranian petrochemical sector. This is a big reason why we are still waiting for a supply driven downturn in the petrochemical industry that was supposed to occur several years ago.
When I first heard about the disaster, I figured that it might be related to Iran’s struggles in petrochemicals. After all, it is common for chemical plant explosions to occur when they are being taken offline for maintenance. The change of state of startup and idling are dangerous periods for plant operators. Similarly, most airline accidents happen when aircraft are taking off or landing. It seemed plausible to me that the accident occurred while some new plant was starting up.
That reasonable hypothesis, however, doesn’t seem supported by the actual evidence.
Figuring out what is going on in the Iranian petrochemical sector always involves a little detective work. Years ago, NPC had plans to build an ethylene cracker and an ethylene glycol plant in Kharg. However, NPC decided, because of feedstock availability, to build it in Assaluyeh instead. Coincidentally, that plant seems to have officially started up yesterday.
So, there is no plant that I know of that is starting up about now in Kharg. So what could the reports be referring to? There is a methanol plant that started up in Kharg years ago. Also, the mainstream media tends to throw around the word “petrochemical” broadly. The term could be referring any number of natural gas and petroleum processing plants on Kharg Island.
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