Eastman CFO Outlines Acquisition Strategy
Jun20

Eastman CFO Outlines Acquisition Strategy

Last week, the Chemical Notebook headed to New York City to attend the 2012 IHS Chemical Financial Forum. Nice event, attended by 60 or so. It was emceed by Robert Westervelt, editor-in-chief of IHS Chemical Week. My dear longtime frenemy did a masterful job moving the conference along and asking good questions, as he usually does. It was a day packed with a lot of good speakers. Curt Espeland, chief financial officer of Eastman Chemical, gave the keynote, which was an overview of his company’s merger and acquisition strategy. This is a pretty timely topic given that Eastman is set to complete its $4.7 billion acquisition of Solutia next month. Eastman’s current M&A strategy is rooted in the turnaround that former CEO Brian Ferguson led a decade ago. Eastman had been a serial acquirer. It made expensive purchases of publicly traded firms like McWhorter Technologies and Lawter International to build up its coatings, adhesives, specialty polymers, and inks (CASPI) business. The acquired business didn’t congeal as planned. When Brian Ferguson took over in 2002, he initiated a three-part strategy for the company, Espeland says. The first part: Shrink before you grow. Eastman sold off $3.2 billion worth of business since 2002. This includes the sale of a large chunk of the CASPI-related businesses it had bought. Momentive now has those units. Eastman sold its polyethylene business to Westlake. A series of divestitures got Eastman out of polyethylene terephthalate. “Before we started this journey, we were the largest PET producer in the world,” Espeland told the audience. “Today we don’t even make the product in any meaningful way.” Worth noting here is that while it got out of commodity packaging polymers, Eastman kept specialty polyesters, leaving intact a core chemistry capability. This seems to be paying off with its Tritan polymer. The next part of Eastman’s strategy: Earn the right to grow. This entailed improving the profitability of the business that it kept. Now with new CEO Jim Rogers, Eastman has switched to its third phase: growth. “Joint ventures and acquisitions has become the primary tool we’re using to pursue that strategic shift,” Espeland said. Curiously, the pre-Ferguson era fomented queasiness over acquisitions at Eastman. “In fact, we had a negative bias against acquisition because of our history in the late 90s,” he said. Management had to reverse that. The company started out small, focusing on small “bolt-on” acquisitions. Through purchases such as Genovique Specialties and Sterling Chemicals, Eastman has quietly doubled the size of its non-phthalate plasticizer business, to $600 million. These acquisitions helped Eastman build capability and confidence—enough to attempt the purchase of Solutia, a deal about 30...

Read More
Eastman Buying Solutia
Jan27

Eastman Buying Solutia

I arrive the office this morning, bright and early, as usual. “Your Top 50 U.S. chemical company survey will get smaller by one company,” C&EN assistant managing editor, Mike McCoy, said. “Do you want me to guess?” I said. “Solutia is one of the firms.” “That is the company being acquired,” I reply. “That’s right.” “PPG is buying them,” I guessed. “No, but that’s an interesting guess,” Mike says. It was a very good guess. “Ashland?” “No, too soon.” Ashland, Mike realized, just bought ISP. “Eastman!” “Very good!” Mike exclaimed, very impressed. Indeed, Eastman is buying Solutia in a $4.7 billion transaction. The relevant details are in my Latest News story here. I have a few observations: 1) It seems like a nice, square deal for all parties. My calculations put the cash and stock portion of the deal at $3,357 million and the debt at $1,377 million, combining for the ~$4.7 billion price. The cash and stock represent a 13.8x multiple over adjusted earnings of $243 million. 2) Since declaring bankruptcy in 2003, Solutia has honed its business where it has a strong position such as hydraulic fluids and polyvinyl butyral (PVB) interlayers for windshields. The cash cow of the portfolio is the technical specialties business, which generated a 38% EBITDA margin. It makes the hydraulic fluids, heat transfer fluids, and insoluble sulfur, used to vulcanize rubber. 3) Integration? PVB is made by reacting polyvinyl alcohol, which Solutia makes, with n-butyraldehyde. It just so happens that Eastman is America’s largest producer of n-butyraldehyde, which it uses to make oxo derivatives like 2-ethylhexanol. 4) Solutia is an ex-Monsanto business. Sterling, which Eastman acquired last year, is a former Monsanto unit. Spooky? Yes. Coincidence?...

Read More