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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.
Espeland
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 times larger any purchase it has contemplated in the current era.
Espeland says the strategic fit between Eastman and Solutia justifies the scaleup. The two firms, he said, are similar in profile. Following its 2003 bankruptcy, Solutia also went through a shrinking phase, getting rid of businesses such as nylon.
Moreover, Solutia is built around strong market positions in business like its Saflex polyvinyl butyral glass interlayer sheet and its insoluble sulfur tire vulcanizing agent. Eastman sees synergies with these businesses. For instance, the company hopes to introduce cellulose-based specialty polymers into tires.
Additionally, and this isn’t something that Espeland highlighted in the talk, there seem to be manufacturing synergies as well. Eastman makes or buys eight of Solutia’s 10 most important raw materials. For instance, Eastman is the largest U.S. producer of n-butyraldehyde, used to make PVB. It’s interesting that Eastman is contemplating building metathesis in Longview, Texas, which would give it more propylene and further enhance the back-integration of its oxo-business.
To listen to Espeland, it doesn’t seem that Eastman is done making acquisitions, though it will pause at it digests Solutia. “After we get through a period of deleveraging, Eastman will be in a position of strength and have the cash to continue to do joint ventures and acquisitions,” he said. When asked about the M&A environment, he joked that while landscape was rife with acquisition targets “no one should look at chemical deals for the next year as we deleverage.”
Monaca, Pa!
Shell Chemical has selected the Pittsburgh area town of Monaca, Pa., as the site of its new ethylene cracker complex. Actually it will be in Potter and Center Townships, which are near Monaca, Pa. (Pop. 6,286, according to Wikipedia). But that narrows it down a lot more than what Shell was previously saying: “I don’t know, Appalachia somewhere or something.”
Monaca is a bit of a chemical town. It is host to a Nova complex that makes Arcel polystyrene resins for foams and expandable polystyrene. Nova calls this the Beaver Valley site. (If that name conjures an image of a valley teaming with beavers felling trees willy nilly, I know the feeling.)
This doesn’t mean that the plant is a done deal. As its press release explains:
“The next steps for this project include additional environmental analysis of the preferred Pennsylvania site, further engineering design studies, assessment of the local ethane supply, and continued evaluation of the economic viability of the project.”
The company isn’t saying much more about the project. It will feature an ethylene cracker and downstream polyethylene and ethylene glycol plants. We already knew about that. There’s nothing new about the size or the timing.
I do have a couple of thoughts about the project:
1) Isolated ethylene and derivatives complexes never work out. If the ethylene cracker goes down, how do you run the derivatives plants and where does the ethane feedstock go? If one of your derivatives complexes goes down, do you run the cracker at reduced rates? It would be nice to see another cracker complex built in the neighborhood that would be connected to the Shell site. I suspect that we’ll probably hear from another company with cracker plans in the region before long.
2) I doubt Shell will build its own polyethylene plant. It hasn’t had any skin in the polyolefins game since it sold its stake in Basell to Access Industries in 2005. I am expecting a partner of some kind on the polyethylene unit. If it does go it alone, I would think that the plant would spew out commodity grades of polyethylene. One example of such a product would be high-density polyethylene for extrusion blow molding—used to make milk jugs. Shell would need something that is relatively easy to sell. Also, the company wouldn’t want to do a lot of switching of grades at the plant because of potential problems with excess ethylene, as I mentioned above.
All this aside, it is great to see such a big chemical plant being contemplated for the region.
Will Hambrick Head Berkshire Hathaway?
Warren Buffett’s annual letter to Berkshire Hathaway shareholders is out this week. Normally, the annual letter of one of the most widely read documents in the business world. This year, given that Warren Buffett has been in the news so much recently with the Buffett Rule and all, it is probably being perused more closely than usual.
There is something for the chemical industry in the letter:
On September 16th we acquired Lubrizol, a worldwide producer of additives and other specialty chemicals. The company has had an outstanding record since James Hambrick became CEO in 2004, with pre-tax profits increasing from $147 million to $1,085 million. Lubrizol will have many opportunities for “bolt-on” acquisitions in the specialty chemical field. Indeed, we’ve already agreed to three, costing $493 million. James is a disciplined buyer and a superb operator. Charlie and I are eager to expand his managerial domain.
I wrote up a small story in C&EN based on this passage. The idea being that Lubrizol is on the hunt for more small acquisitions. My boss, assistant managing editor Mike McCoy, had an even more interesting interpretation of the line “eager to expand his managerial domain.”
Mike suggested that maybe “managerial domain” would extend to the whole of Berkshire Hathaway. In other words, perhaps Buffett has Hambrick in mind as a successor.
I snickered at first. It seems like a crazy idea because it would have Buffett giving the keys to the kingdom to someone who has only been with the company since September. And Hambrick would go, in relatively short order, from running a mid-sized specialty chemical maker to heading all of Berkshire-friggin’-Hathaway.
BUT…Mike isn’t the only one to so speculate. This well-reasoned article by Harry Wallop in the Telegraph puts Hambrick as one of four possible candidates along with BNSF CEO Matthew Rose, reinsurance chief Ajit Jain, and Geico boss Tony Nicely.
The “eager to expand his managerial domain” appears in paragraph following the revelation that he has come up with an unnamed successor and two backup candidates. Why was James Hambrick the next thought to come to mind?
The phrase “eager to expand his managerial domain” is a cutesy way of hinting at a successor. Warren Buffett is fully capable of cute. Here he is playing the ukulele on television.
Another line from the letter that I would like to overanalyze is this: “James is a disciplined buyer and a superb operator.”
That is an enormous compliment coming from Warren Buffett. Picking stocks and buying companies is what Warren Buffett does. Go to any business section of any book store and you’ll oodles of books on Buffett’s methods. (One in this genre, The Intelligent Investor by Buffett’s mentor Ben Graham, is essential business reading.) Buffett calling Hambrick a disciplined buyer is kind of like John Elway saying “nice pass” to a kid tossing a football around on the beach.
Lubrizol’s track record of acquisitions is pretty good. The Noveon acquisition back in 2004 diversified the company away from lubes and additives. A couple of years ago it did lose a bidding war to BASF for Cognis. Backing off might have taken some discipline.
Another interesting deal was its purchase of Dow’s thermoplastic polyurethanes business for $61.4 million at the end of 2008. The business generated $74 million in revenues in 2008. The deal occurred right when Dow’s JV with PIC of Kuwait broke up and the company was left struggling to finance its purchase of Rohm and Haas.
Last year I was talking about that period in Dow’s history with Dow CEO Andrew Liveris. “One of the assets, I won’t tell you which one, I think we sold in a rush,” he said. “It was a small sale so it didn’t matter.” I suspect, but obviously don’t know, that he meant the thermoplastic polyurethanes unit. If that is the case, I wonder if Buffett, who holds billions of dollars worth of Dow preferred stock, noticed.
Let’s not forget that Buffett isn’t planning to step down while he is still able to function and wow us with mean uke solos. He’ll have plenty of time to groom a successor.
The Announcements Thus Far
I am working on C&EN’s annual world outlook piece. I put together this table for that package. These are all the formal announcements of new ethylene capacity in the U.S. It doesn’t count companies, such as Formosa, which have been studying new capacity but haven’t put out anything official. It also doesn’t include Nova’s expansion plans in Canada.
The grand total is nearly 7 million metric tons of new capacity. That is about 5% to 6% or the present world total. Moreover, all of this capacity has been announced only since late March.
Also, it doesn’t include Ineos, which is studying a 115,000-metric-ton expansion at its Chocolate Bayou cracker.
| SHALE BONANZA | ||||||||
| U.S. expansions can total nearly 7 million metric tons by 2017 | ||||||||
| COMPANY | LOCATION | DATE | CAPACITY | |||||
| (’000s METRIC TONS PER YEAR) | ||||||||
| NEW CRACKER COMPLEX | ||||||||
| ChevronPhillips | Cedar Bayou, Texas | 2017 | 1500 | |||||
| Dow^a | Gulf Coast | 2017 | 2300 | |||||
| Sasol^b | Lake Charles, La. | TBD | 1400 | |||||
| Shell Chemicals | Appalachia | 2017 | 1000 | |||||
| EXPANSIONS OF EXISTING FACILITIES | ||||||||
| LyondellBasell | La Porte, Texas | 2014 | 400 | |||||
| Williams | Geismar, La | 2013 | 275 | |||||
| Westlake | Lake Charles, La. | 2012 | 100 | |||||
| Total | 6975 | |||||||
| a Capacity figures for Dow Chemical include a new steam cracker, incremental expansions, and the restart of a cracker in Louisiana. | ||||||||
| b Capacity figures for Sasol is the upper range of an estimate. | ||||||||
| TBD=To be determined | ||||||||
DuPont Revises 2011 Guidance
DuPont has reduced its 2011 earnings-per-share guidance by a dime, down to a range of $3.87 – $3.95.
In the company’s press release CEO Ellen J. Kullman said something somewhat disconcerting:
“We are seeing slower growth in certain segments during the fourth quarter, driven by economic uncertainty. This uncertainty is contributing to ongoing conservative cash flow management in some supply chains.”
Inventory drawdowns are very normal this time of year. A bigger inventory reduction than expected can mean many things. For instance, it can mean that customers expect prices in the supply chain to decline. (The most benign option.) Customers can be cashing out their inventories in order to brace themselves for potential Armageddon. (This happened during the 2008 panic.) Or customers, not knowing what the future has in store, don’t want to tie up too much of their working capital in inventories. (Middle of the road, not necessarily bad. This seems to be Kullman’s view.)
Also, keep in mind that DuPont has reset its 2011 guidance a bunch of times. Here are the changes:
Oct. 25, 2011: $3.97 – $4.05
July 28, 2011: $3.90 – $4.05
Apr. 21, 2011: $3.65 – $3.85
Jan. 25, 2011: $3.45 – $3.75
Dec. 14, 2010: $3.30 – $3.60
DuPont is still way ahead of where it was in April.
Looking at the list reminds me of Dow Chemical, which rather famously doesn’t give earnings guidance. I do see the wisdom in such a policy. Real numbers come in every quarter. Analysts have their own set of fake numbers. Why have another fake number? (Companies tend to lowball these anyway to set the stage for an artificial earnings beat.)
If I am ever at the helm of a public company*, I would adopt the no guidance policy.
*It would be a breach of fiduciary duty for a board of directors to let such a thing happen.
Rumors Swirling Around DuPont’s Coatings Unit
A bunch of stories have been circulating that DuPont is putting its performance coatings business up for sale.
The DuPont business makes automotive OEM coatings, which are applied in the assembly plant; automotive refinish coatings; and powder coatings. It earned $249 million in operating income on $3,805 million in net sales in 2010. It has been DuPont’s least profitable segment for the last three years.
Bloomberg seems to have been the first out of the gate Friday afternoon. Citing “people who spoke on the condition of anonymity because the talks are private”, it reported that DuPont retained Credit Suisse to shop the business around. The value of the coatings business would be between $3 billion and $4 billion. The Bloomberg piece had DuPont selling the powder coating unit separately from the automotive coatings business.
Reuters also had a story out Friday afternoon. It contained the same details regarding Credit Suisse as well as the price range for the business and cited “sources familiar with the matter.”
The Reuters piece contained some analyst speculation that BASF, PPG, or AkzoNobel might be interested in the business. (I would personally go with Akzo out of those choices because I’m not sure that regulators would let PPG or BASF have the OEM paint business. Though, I think Akzo is already big in refinish. Perhaps “none of the above” is a better choice.)
The Wall Street Journal published a story on the matter yesterday. It has the same details, citing “a person familiar with the matter”.
When Kevin McCarthy from Bank of America Merrill Lynch asked about disposing of the unit in a conference call last week, DuPont CEO Ellen Kullman wouldn’t say much:
So one of the things I think that’s been limiting DPC this year has been the raw material increases. I mean, energy and freight, I’ve just seen a lot of increases on their raw on the whole board, and I think that’s been a drag on them as they really gone out. And I think they’ve done a tremendous job with new products and with customers getting improvements. So I think being stable for them in this environment is a very positive thing. So productivity, they continue to focus on it. Fixed costs as a percent of sales is down 110 basis points in the third quarter of ’11 versus third quarter of ’10. I still maintain and talk into the team there that we can get to a PTOI margin target of 10% next year, and we continue to drive hard on that. And we’ll see where it ends up. We just — John McCool’s been there just a year now with the new team. I think they’re making great progress, and we’ll see where they end up.
Translation: We are trying to fix the business. We are making good progress. But some circumstances, such as raw material prices, are out of our control. Also, she said “we’ll see” twice. But she doesn’t use the word “options” once.
Chief CMAI Economist Has Left
I’m writing about the economy this week for C&EN. Scouring the world for economists that specialize in chemicals to quote (There aren’t many), I called CMAI looking for chief economist Tim Hopper.
He is no longer there.
Hopper was hired last November to replace long-time CMAI economist Arved Teleki. Hopper gave the economics presentation at CMAI’s conference in March. I was told over the phone that Hopper left about a month ago. I wasn’t told why, though I was assured that CMAI is in the process of finding a replacement.
IHS acquired CMAI in May and has a number of economists of its own in house.
Teleki played an important role in CMAI. His forecasts were important in underpinning the assumptions for analysis of specific chemical markets, for example, polyethylene market growth, and so on.
BASF And Total Take Over Sabina
Here’s a development I find interesting. BASF and Total Petrochemicals are taking over Shell Chemicals’ interest in their Sabina joint venture.
Sabina started up in 2004 in Port Arthur, Texas, to extract butadiene from C4 streams. Two-thirds of these streams came from Shell’s Deer Park cracker. The rest was supplied by a naphtha-based cracker Total (then briefly known as Atofina) and BASF had just completed at the time. It started up with a capacity for 400,000 metric tons of butadiene. Sabina also alkylates iso-butene into octane for gasoline blends. The n-butene cut goes to a metathesis unit, giving the cracker venture greater propylene yield.
Shell owned 60% of the venture, BASF had a 24% stake, and Total had a 16% interest. With the change in ownership, Sabina will have a 60% BASF and 40% Total ownership, like their cracker venture.
Shell hasn’t put out a press release on this. When I asked the company why it was exiting the venture, they sent me this statement:
“Shell has signed an agreement to exit the Sabina venture effective August 1, 2011. This action fits well with the Shell strategy to streamline and concentrate its downstream portfolio. Shell plans to continue supplying our customers with product and accepting supply from our feedstock suppliers without interruption.”
The important context here is that like many other chemical makers, Shell has been moving to lighter feedstocks because of ethane from natural gas shale. Shell has even undertaken capital projects in Deer Park and Norco, La., to enable it to crack lighter feeds. As a result, Shell probably has less C4’s in its system now and likely can’t or doesn’t want to be tied up with the commitments to Sabina. If that is the case, I wonder if Sabina is now struggling to find C4s.
Liveris On The Debt Ceiling
Dow CEO Andrew N. Liveris put out a press release on July 14 regarding the debt ceiling negotiations in Washington. Here it is in its entirety:
MIDLAND, Mich.–(BUSINESS WIRE)–Andrew N. Liveris, Dow’s chairman and CEO, stated today, with reference to the bi-partisan impasse on raising the debt ceiling:
“Business doesn’t have a seat at the table in these talks, but we sure have a stake in the outcome. All Americans do – we are all in this together. There’s huge opportunity for our nation if both parties reach a meaningful agreement, and huge consequences if they do not. We need a resolution as soon as possible and urge all involved in the negotiations to continue to work towards a solution that eliminates uncertainty and puts stability into our economy.”
Whenever anyone uses the phrase “We are all in this together”, you can rest assured that the speaker isn’t saying much and is relying on someone else to get down to the business of hammering out the particulars. This is surprising from someone who wrote an entire book about about corporate taxes, bureaucracy, many other topics directly related to what is being negotiated in Washington.
Liveris isn’t alone, GE’s came out with a dramatic pronouncements before the U.S. Chamber of Commerce last week where he didn’t say very much at all either. Via a WSJ Blog:
“I just think we need certainty about the debt ceiling and we need it now. That really can only happen here. Let’s do it now.”
Do what, Jeff?
But a little perspective might make for a more fair assessment of these two executives. Both are involved with the Obama Administration. Liveris last month was named co-chairman of President Obama’s Advanced Manufacturing Partnership. Immelt is the chairman of The President’s Council on Jobs and Competitiveness. It might be significant that Immelt and Liveris aren’t backing particular Obama proposals.
And probably more than anything else, these executives could be worried that the far-left and far-right activists in Congress will scuttle an agreement should it be made. If that sounds crazy, remember in September 2008 when the House of Representatives rejected TARP and the Dow Jones Industrial Average dropped 700 points?
So what Liveris and Immelt said is probably better than saying nothing at all.
Thoughts On Bio-Plastics
Sorry for the light posting recently. I blame the news, which is sauntering along at a midsummer’s pace. Last week, OM’s acquisition of a German magnet maker was about the most exciting thing to hit C&EN’s Edison, N.J., business newsroom. While I’m sure that it is an important and exciting development for OM, it didn’t inspire me to blog. I considered a post comparing it to OM’s purchase of Degussa’s precious metals business a few years back. (If you don’t remember that, that’s OK, OM didn’t own it for very long.) After further reflection, that wasn’t such a good comparison.
Things seem to be turning around a little bit this week. Lonza is buying Arch Chemical, a one-time spinoff from bullet and chlorine maker Olin. One thing that intrigues me about that purchase is that it is a major investment from Lonza in specialty chemicals, not really in fine chemicals. I’m beginning to think every small to mid-sized chemical business is a target for a strategic acquisition nowadays.
A couple of weeks ago, I attended the BioPlastek Forum in New York City. There is an article on the conference in today’s C&EN. In the piece, I profile the growing rivalry of new-to-the-world materials brought to us by biology versus bio-based drop-in substitutes for petrochemical feedstocks for conventional plastics.
There was some debate at the conference. On the one hand, brand owners really seem to be interested in plastics like Braskem’s ethanol-based polyethylene. Such materials align with their existing manufacturing infrastructure and can be recycled just the same as ordinary polyethylene. There were plenty of start-ups with routes to chemicals like p-xylene and adipic acid.
On the other hand, a few firms touted new materials, with new beneficial properties. For instance, Avantium presented on polyethylene furanoate, a polyester made from furan dicarboxylic acid. It has an oxygen barrier six times greater than PET’s.
Where do I stand? In the middle, and not just because I don’t want to offend anybody. I don’t see these things as mutually exclusive. There are legitimate worries that PEF bottles might someday muck up the recycling stream. But as one major brand owner whispered to me during a discussion, “More than 50% of packaging isn’t recycled anyway.”
I wanted to chime into the conversation. But, as a journalist, I figured it was best to just shut up and take notes. However, one point that I would have made if I did say something is that breaking new materials into the plastics world has been a very hard thing to do, even for petrochemically derived plastics. The last major resin to do so was linear low-density polyethylene about 30 years ago. There are a few other resins since that time that have had success—such as DSM’s nylon 4,6—but these are specialty materials. Some attempts by the petrochemical world to establish major new polymers—such as Shell’s Carilon, Dow’s Index Interpolymers, and others—failed.
More recently, there have been some successes, at least in specialty materials. Eastman’s Tritan co-polyester is an example. Its excellent dishwasher-safe properties have made it a ringer in housewares like cups. Also, the BPA issue has rewarded it with volumes in baby bottles and sundry other things infants put in their mouths.
The recipe for success for new bio-based plastics is probably to target sectors that need the new properties the most. For instance, PET never really had a straight forward solution to the beer problem, perhaps PEF can help. The bottled water market, however, sounds like a bad idea.
Another charge that I want to address is that drop-in substitutes can only compete on price. I heard that a bunch of times during the conference. I think it is wrong. The underlying notion is that consumers aren’t willing to pay more for bio-based materials. That part is true.
But what that statement overlooks is that brand-owners are willing to pay more for bio-based materials. Coca-Cola, Heinz, and Pepsi, seem to think that bio-based plastics enhance their image and are willing to pay for that, especially if they are exactly the same materials as they were using before. Interestingly, when an engineer from Toyota was asked whether bio-based materials have consumer appeal, he pointed out that Toyota has been rolling out the materials in vehicles like hybrids. The bio-based materials reinforce the green branding. I found that interesting.
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