The Chemical Notebook

January 27th, 2012

Eastman Buying Solutia

By Alex Tullo • Posted in M&A • No Comments

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? Probably.

January 25th, 2012

President Obama Champions Manufacturing In The SOTU

By Alex Tullo • Posted in Manufacturing • 1 Comment

During last night’s State of the Union address, the president spent roughly the first quarter of the speech talking about manufacturing. Does Obama have the right solutions? Time will tell. (It is an election year, so little will get done anyway.) But the Administration has certainly identified the right problem: the need to turn around manufacturing in the U.S.

The speech began with the auto companies:

On the day I took office, our auto industry was on the verge of collapse. Some even said we should let it die. With a million jobs at stake, I refused to let that happen. In exchange for help, we demanded responsibility. We got workers and automakers to settle their differences. We got the industry to retool and restructure. Today, General Motors is back on top as the world’s number-one automaker. (Applause.) Chrysler has grown faster in the U.S. than any major car company. Ford is investing billions in U.S. plants and factories. And together, the entire industry added nearly 160,000 jobs.

We bet on American workers. We bet on American ingenuity. And tonight, the American auto industry is back. (Applause.)

What’s happening in Detroit can happen in other industries. It can happen in Cleveland and Pittsburgh and Raleigh. We can’t bring every job back that’s left our shore. But right now, it’s getting more expensive to do business in places like China. Meanwhile, America is more productive. A few weeks ago, the CEO of Master Lock told me that it now makes business sense for him to bring jobs back home. (Applause.) Today, for the first time in 15 years, Master Lock’s unionized plant in Milwaukee is running at full capacity. (Applause.)

Let’s make one thing clear: “bankruptcy” isn’t the same thing as “going out of business”. The public seems to conflate those two things, perhaps for understandable reasons. Usually the 11 o’clock news stories about bankruptcy filings are discussing local retailers. Retailers are usually laden with a lot of working capital—namely inventory—and not a lot of fixed assets (Usually some readily sellable real estate and store infrastructure). Such retailers are easily liquidated and simply disappear.

Big manufacturers have a lot of equipment that isn’t as easily transferrable to other firms. If there had been a normal bankruptcy procedure, GM and Chrysler, could very well have emerged as successful car companies. LyondellBasell went through bankruptcy around the same time. It emerged, and it is now making manufacturing investments again.

However, it is also likely that the government-controlled procedure might have allowed for a more orderly process, especially in regards to a labor-management agreement. And the government likely offered the financing on more attractive terms than private banks would have been able to provide in the middle of the financial crisis.

Much of the remarks had to do with tax policy:

Continue reading →

January 20th, 2012

Georgia Gulf To Westlake: Not So Fast!

By Alex Tullo • Posted in Petrochemicals, Plastics • No Comments

You may have heard that Georgia Gulf has rebuffed a $30-per-share takeover bid from Westlake. Here are a few points:

1) By my calculations, the bid is worth just over $1 billion, or close to $1.7 billion, including Georgia Gulf’s long term debt. Georgia Gulf’s expectations for EBITDA (earnings before interest, taxes, depreciation, and amortization) for 2011 are between $245 million and $255 million. This makes the offer seem a little cheap. However, Georgia Gulf’s book value (equity less intangibles and goodwill) is about $243 million.

2) Georgia Gulf has been through heck and back. It bought building products maker Royal Group technologies for $1.6 billion in 2006. Congratulations if you recognize that this was the worst possible time for a company to increase its exposure to the housing market. The downturn didn’t bankrupt Georgia Gulf, but it came close. The company almost got delisted from NYSE when its market cap slipped under $75 million. It needed time from creditors for payments due. Moreover, a debt for equity swap amounted to a quasi-bankruptcy: shareholders were diluted, though not completely wiped out.

3) Strategically, this is a no-brainer for Westlake. Both are integrated chloro-vinyl companies. Westlake is integrated back into ethylene; Georgia Gulf isn’t. Both make fabricated products, with Westlake’s business oriented towards pipe and Georgia Gulf leaning towards window and door profiles. Westlake also makes polyethylene. Georgia Gulf has a cumene/phenol business.

4) Expect more to come. I would have to think that Westlake will follow with a tender offer. And given that the stock is trading at above $30 per share, I would expect to see Westlake sweeten the deal somewhat. I’m not terribly sure if the bid makes it into the courts or to a proxy fight.

5) Georgia Gulf is preparing a defense. Westlake already owns about 4.8% of Georgia Gulf. A poison pill, in the form of a rights offering to Georgia Gulf shareholders, will prevent Westlake from owning more than 10%.

6) Georgia Gulf had a staggered board until 2010. A staggered board means that not all of the directors are up for reelection every year. Now, Georgia Gulf directors are up for election when their term ends. By my reckoning, Georgia Gulf has five of its eight directors up for reelection later this year. Three will serve until 2013. This might present an opportunity for Westlake to stack the board, depending on the nomination process.

7) I wouldn’t be surprised to see competing bidders. The last big takeover drama in the industry was Air Products’ run at Airgas. There were few potential suitors for Airgas. There may be more for Georgia Gulf. Mexichem comes to mind. It is trying to buy Wavin, Europe’s largest producer of plastic pipe for about $650 million. Why not drop that and string together a Georgia Gulf bid? Braskem also comes to mind. It is the big wheel in Brazilian chloro-vinyls and has been acquisitive in recent years in the U.S., buying both Dow’s and Sunoco’s polypropylene business.

8) There are echoes of Air Products/Airgas in Westlake’s bid. Both Airgas and Georgia Gulf called their unsolicited bids opportunist attempts to take advantage of share prices that were temporarily in the cellar. Both Air Products and Westlake responded that with their offers, shareholders of the target companies wouldn’t have to wait for fortunes to turn around to see a payday. Nearly a year ago, Air Products was forced to drop its $70 bid. Now Airgas is trading at above $80 per share.

9) One has to concede the first riposte to Georgia Gulf. Shares were worth more than $40 last year before the grumblings over European debt last summer. Georgia Gulf had been on the upswing in recent months. Westlake seems to be acting now before its opportunity slips away.

December 20th, 2011

The Announcements Thus Far

By Alex Tullo • Posted in Miscellaneous • No Comments

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

December 16th, 2011

Coke Ups The PlantBottle Ante

By Alex Tullo • Posted in Petrochemicals • 1 Comment

Carnegie Hall sits on the corner of 7^th Ave. and 56^th St. in Manhattan. How does one get there? Well, as the old adage goes, practice. (The Chemical Notebook took X1 express bus from Staten Island.) Nothing quite says “making it” in music like playing Carnegie Hall for the first time.

Something similar happened yesterday, only a couple of blocks away, at the Time Warner Center on Columbus Circle. Three startup firms held a joint press conference with the biggest brand name of them call, The Coca Cola Company, to announce a collaboration in what has become one of the biggest challenges of the plastics industry: a wholly renewable polyethylene terephthalate bottle. The three firms were Gevo, Virent, and Avantium. (I’m abusing the term “startup” a little bit by lumping Avantium in because, as chemists know, Avantium is a well-established name in high-throughput screening.)

Coca-Cola has had a PlantBottle on the market since 2009. The bottle is made from polyethylene terephthalate, but it is a different kind of PET. PET is made via the condensation of ethylene glycol with purified terephthalic acid. The PET in the plant bottle uses bio-based ethylene glycol (EG) instead of petrochemical-based EG. As a result, the plant bottle is 30% renewable.

Not to denigrate the PlantBottle, but the chemistry to get to bio-EG is straight forward: dehydrate ethanol to get ethylene and then convert ethylene into EO/EG via conventional routes.

The other 70% to go to a 100% bottle is a different matter altogether. Making PTA–or its common petrochemical precursor, paraxylene, hasn’t yielded to biology too easily. These are far more complex molecules. More work needs to be done before such a route can be commercially viable: Hence, yesterday’s event.

“We understand we can’t do it alone,” noted Rick Frazier, Coke’s VP of commercial market supply. “We need to work with partners.” He said Coke vetted about 30 companies with possible solutions. The three firms he shared the dais with were the ones that made the cut.

The three companies have very different routes to bio-based PET.

Virent has a catalytic process to turn sugars in a range of hydrocarbons, including PX.

Gevo ferments sugar into isobutanol, which after subsequent chemical reactions, is transformed into PX. Its technology is easily retrofitted into existing ethanol plants. Cheap ethanol plants are plentiful.

Avantium is the oddball of the bunch. It uses a catalytic process to turn sugar into furan dicarboxylic acid. This is condensed with ethylene glycol to make polyethylene furanoate. This is a polyester that, according to the Avantium, exceeds PET in terms of oxygen barrier and temperature performance. The polymer might seem like a natural for hot fill containers or beer. I suspect that if the collaboration is successful, we’ll see Avantium’s polymer in juice bottles or smaller soda bottles.

At the conference, The Chemical Notebook noted, in a question, that the collaboration felt like a competition. The Chemical Notebook is kind of a jerk and wanted to see the firms start sniping at each other. Conflict makes for a better story.

They were all very civil. Each of the company executives noted that the PET market was plenty big for all of them and that working with Coke was quite the coup, no matter how you look at it. “We are all the winners,” said Virent CEO Lee Edwards. “We are all here with the Coca Cola Company.” Frazier noted the company was also looking for a diversity of supply of bio-based PET.

That’s all very true. The market for PET in North America alone is roughly 10 billion lb. By the time these firms start knocking heads—perhaps a decade from now–bio-PET will be a commodity (even RC will use it) and no one will care anymore.

The conference was a little thin on details. For instance, I wanted to know more about the financial underpinnings. Was Coke taking equity stakes in the companies? Were there milestone payments? Other than assurances that Coke was putting its money where its mouth is, we got none of that. (I’ll watch Gevo’s SEC filings in case there’s a mention.)

Reporters wanted to hear more about its future ethylene glycol plans. We were told to stay tuned. I was curious about the polypropylene caps and labels. That’s a goal, Frazier said, but not a near-term one.

The time line for the bottles isn’t clear. For now, Coke is saying it wants all of its packaging to be renewable by 2020. Frazier mentioned 2015 as a date for a possible rollout, but he wouldn’t commit to it.

December 14th, 2011

DuPont CEO Irked By Reporters

By Alex Tullo • Posted in M&A • 2 Comments

Here at the Chemical Notebook, we recently posted about some rumors swirling regarding DuPont possibly putting its coatings business up for sale. At DuPont’s investor day yesterday, DuPont CEO Ellen J. Kullman fielded a question about this from Deutsche Bank analyst David Begleiter. In her answer, she revealed that she’s none too pleased with the reports:

Yes, I mean, around the rumors that have been swirling, quite frankly, I’m a little appalled at the (inaudible) responsibility of certain media outlets. I think it’s just terrible. I mean, I go into places and some people say, hey, I saw your announcement. Obviously, we didn’t make one. But we have 13 businesses. We put them through a very vigorous portfolio process around markets, competition, our capability, and science. We establish very clear goals. And we expect them to meet them. We put in top leaders like John McCool, who just went in to coatings a year ago. And very specific goals for improving.

She continued…

But we’ve been very clear. If things — any business. I love all my children equally until I don’t love them. It’s my phrase. Now that does bother my own children, but in business it seems to work. But I mean, so time we’ll tell about any part of our portfolio and where it sits. You saw the pruning that we do on the product lines that both industrial chemicals and crop protection and things like that have done in the list. But if something changes, we’ll be the first one to come out and talk to you. But first and foremost, we’ve established aggressive goals. We have the right kind of leadership. Let’s see what we can get done.

A few points:

1) Two of these reports, from Bloomberg and Reuters, broke on the afternoon of October 28, nearly simultaneously, citing people familiar with the matter. (My previous post links to all three). Dow Jones had its own version a few days later. When a story is deemed solid, journalists are under no ethnical obligation to await an official announcement.

2) Perhaps Kullman should be lecturing the probable leakers. DuPont’s investment bankers would be a good first call. Though, they were probably using their best judgment, too.

3) Extending the children analogy. Is the coatings business that adult child that still lives with his parents and needs a gentle push into his own apartment?

4) I remember back in 2007, Britain’s Sunday Express ran a kooky story about how private equity firms and a Middle Eastern government were planning a takeover of Dow Chemical. CEO Andrew N. Liveris noted that the rumors appeared “on the third page of a third-rate newspaper in the U.K.” It later turned out that such parties, and two Dow executives, really were conspiring to sell Dow. Liveris fired them when he learned about it, straight from the lips of J.P. Morgan CEO Jamie Dimon.

December 9th, 2011

DuPont Revises 2011 Guidance

By Alex Tullo • Posted in Economics, Miscellaneous, Specialty Chemicals • No Comments

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.

December 7th, 2011

PPG Looks To Secure Titanium Dioxide

By Alex Tullo • Posted in Inorganic Chemicals, Manufacturing • No Comments

At an analyst meeting this week in New York City, PPG Industries chief technology officer Charles F. Kahle II announced that his company was looking to partner with a TiO₂ producer.

Here’s the context: supplies of TiO₂ white pigments and the ores that are used to produce them are exceedingly tight. This has prompted Tronox to merge with the South African mineral sands producer Exxaro and is the reason Saudi Arabia’s Cristal is planning to construct an ilmenite processing plant in Saudi Arabia. Cristal has also been increasing its interest in its mining affiliate in Australia.

And let’s not forget that paint maker AkzoNobel aims to build a white pigment plant in China by 2014. In addition, DuPont is planning to expand capacity by 350,000 metric tons per year, including a new plant in Altamira, Mexico.

Kahle says PPG, one of the world’s largest paint companies, has its own TiO2 technology. The company is willing to form joint ventures, license technology, collaborate technologically, and provide technical assistance with TiO₂ producers. He pointed out that the company previously made TiO₂ in Natrium, W.Va.

I had never heard of such a plant. So I consulted the C&EN archives. Turns out PPG did have a plant…which closed in 1971 (C&EN, June 28, 1971). To illustrate how long ago that was, let me point out that the number one single when the C&EN article come out was It’s Too Late/I Feel The Earth Move by Carole King.

The plant had opened only two and a half years before. There was overcapacity in the industry and PPG’s source of raw materials, a rutile mining affiliate in Sierra Leone, was in receivership. “PPG says technically the plant was a success, that it was well satisfied with its process, and that it was and still is proud of the plant,” the article said. Apparently, the company is still proud.

There was a rash of plant closures in 1971, the article noted. “It’s beginning to look as if 1971 will be remembered as a year the chemical industry bit the bullet,” it said. (I do like our use of the indefinite article to hedge against the possibility that there could be future years of bullet biting.) Good year for Carole King, though.

November 17th, 2011

Whoa! That’s A Lot Of Ethane

By Alex Tullo • Posted in Petrochemicals, Plastics • 1 Comment

A new report from BENTEK Energy and Turner, Mason & Co. says that because of shale, we should expect a 40% increase in natural gas liquids production in five years. The increase amounts to 950,000 barrels per day of new natural gas liquids by 2016.

That is an extraordinary amount of new feedstocks for the chemical industry. I ran my own estimates of how much ethylene production all these NGLs can support. I assumed 75% ethane content in the NGLs. I came up with 11 million metric tons of ethylene per year. These NGLs would also yield about 3.7 million metric tons of propylene (assuming propane from the NGLs is dehydrogenated) and other stuff.

If the report, and the Chemical Notebook’s estimates, are correct, or nearly correct, then all the announcements we’ve been hearing about new ethylene capacity aren’t nearly tapping out shale’s potential for petrochemicals. John Stekla, CMAI’s director of ethylene, gave a recent presentation where he forecast about 6 million metric tons of new ethylene capacity by 2016. (see slide 29).

If not feedstocks, there is a factor that would limit the amount of new ethylene capacity that can be built. That is markets. Can the world really swallow more than 11 million metric tons of polyethylene, vinyl chloride monomer, ethylene oxide, and other derivatives from the U.S.? The world ethylene market today, Stekla points out, is around 120 million metric tons.

My own thoughts are that we probably will see more capacity announcements in the U.S., though not to the tune of another 5 million metric tons.

November 10th, 2011

Oxiteno Considering Bio-based Ethylene Glycol

By Alex Tullo • Posted in Petrochemicals, Specialty Chemicals • No Comments

I just came back from Buenos Aires, where I attended the annual petrochemical meeting put on by APLA, Latin America’s main chemical trade group. The meeting is a great place to connect with chemical executives from the region.

At the event, I ran into Pedro Wongtschowski, the CEO of Brazilian energy and chemical conglomerate Ultrapar. Oxiteno, the company’s chemical arm, makes ethylene oxide, ethylene glycol, ethoxylates, and specialty chemicals.

I have long wondered if the company would get involved in bio-based ethylene glycol. Since 2009, Coca Cola has been using the “Plant Bottle”, in which bio-based ethylene glycol is substituted for petroleum-derived ethylene glycol in the polymer backbone. The bio-based glycol is made from bio-based ethylene, made via the dehydration of ethanol. Coca Cola has been sourcing the ethylene glycol from a firm in India and its sugar has come from Brazil.

Obviously, the supply chain would be simplified considerably with a Brazilian glycol supplier. And Oxiteno, being the country’s main ethylene oxide/ethylene glycol maker, is in attractive position for such business.

So I asked Wongtschowski about this.

He told me that bio-based ethylene oxide and ethylene glycol has been under active consideration.

The company seems to have some options in front of it, such as whether it would feed bio-based ethylene into an existing ethylene oxide plant or build a new plant. The company also seems to be deciding on whether to construct an ethanol dehydration plant itself or buy ethylene from Braskem, which has been making polyethylene from bio-based ethylene since 2010 and recently agreed to supply bio-based ethylene to Lanxess for EPDM production. “We are talking with Braskem to determine the most attractive option for all parties involved,” he said.