Posts Tagged → Huntsman
This week saw a good old fashioned back-integration deal in the chemical industry. I wrote a C&EN Latest News on the merger of Tronox with Exxaro’s Mineral Sands unit that includes the essential details. Not every factoid can make it into limited space, thus here are a few more observations:
- Tronox’s back-integration isn’t unique. DuPont runs mining operations near Jacksonville Florida. Cristal, which is largely the former Millennium Inorganic Chemicals, has mineral sands operations in Brazil and Australia. The Brazilian mine came with Millennium’s purchase of Bayer’s TiO2 plant in Bahia, Brazil. Here’s an article I wrote about the mine back in 1998 for the then Chemical Market Reporter. Turns out, Millennium kept the mine after all. Cristal’s Australian mine is a relatively new development. In 2008, Cristal took over full control of Bemax, an Australian mining firm. It previously had a 34.5% interest.
- The financial details are a little hairy, which I why I left them out of the C&EN story. I won’t get into them much here either. The old Tronox and the Exxaro assets will be pooled into a new holding company, which will be split 61.5%/38.5% between existing Tronox shareholders and Exxaro Resources. (There are different classes of existing Tronox shares, which is only important to Tronox shareholders.) The new company will be “domiciled in Australia”, which means technically headquartered in Australia, but will trade on a major exchange, probably the New York Stock Exchange. Exxaro is retaining a 26% stake in the South African mining operations to fulfill local regulatory operations. When those requirements eventually expire, Exxaro will have an option to swap that stake for another 3.2% of Tronox.
- Recent share prices imply a value of $3.4 billion for the new Tronox.
- In 2009, Huntsman Corp. tried, and didn’t succeed, to buy most of Tronox’s assets out of bankruptcy for $415 million. Incidentally, Huntsman’s last major acquisition was Ciba’s textile effects business back in 2006. Five years without a major Huntsman acquisition feels like an eternity.
- The premise of Tronox’s acquisition is to facilitate the expansion of its TiO2 pigment business by securing a supply of ore. The company is now considering a new pigment plant in South Africa. It should be noted that Tronox’s existing joint venture with Exxaro, Tiwest, is integrated into mineral sands in Western Australia. The partnership completed a capacity expansion late last year. The 40,000-metric-ton-per-year increase brought capacity there up to 150,000 metric tons.
The Dow Jones Industrial Average’s 513 point, 4.3% decline was bad yesterday. Huntsman Corp’s $5.58, 30.5% decline was even worse. (There is no typo in the preceding sentence.)
Such declines among large chemical companies are pretty rare. In fact, they mostly happen to target companies of acquisition attempts that go up in smoke. Huntsman has actually had similar declines. One was in June 2008, when Hexion reneged on its acquisition offer, causing Huntsman stock to decline by 40%. And in December that same year, when the two companies settled their lawsuits against each other and Huntsman lost about half its value.
Huntsman’s quarterly, adjusted per-share earnings were 48 cents, missing Wall Street analyst estimates by a penny. Huntsman actually earned 31 cents in the year-ago period. But this earnings season, other companies like Dow were blowing through estimates, making Huntsman an outlier.
There were few of negatives in the quarter, Huntsman’s earnings were impacted by strong exposure to the Swiss franc. Its advanced materials business—which makes thermoset resins for composites-had difficulty passing along price increases. Its textile effects unit has been impacted by high cotton prices.
From a Reuters report, there seemed to be an interesting exchange during the earnings call:
Jeff Zekauskas, a JPMorgan analyst, was bothered because the company reported results only 90 minutes before the conference call, leaving him little time to wade through unusually complex financial tables.
“It’s very difficult to reconcile all of the income statement numbers to the data that you provide,” Zekauskas told Huntsman executives on a conference call.
Huntsman said he thinks his company gives the right amount of information.
“We’re certainly going to be looking internally as to any changes we would make,” he said. “I think we give plenty of pages of financial information.”
The report does make it seem like there was more of a testy exchange between Zekauskas and Huntsman than there indeed was.
Here is what Zekauskas said, according to a Seeking Alpha transcript:
So if I could just, make one comment. When you report your earnings, it’s about an hour and a half before your conference call and your financials are quite complex and it’s very difficult to reconcile all of the income statement numbers to the data that you provide. And so what you might consider is you might consider a more complete reconciliation so that the adjustments can be made more easily, and so it’s easier for people to focus on the fundamentals of what you reported rather than trying to reconcile the numbers, or it’s at least something to consider.
This seems more of a critique about how Huntsman is presenting the numbers than an accusation of wrongdoing. (Full disclosure, I tried following the adjustments in the release and quickly gave up.)
To Zekauskas’s remark, the Huntsman CFO Kimo Esplin replied “fair enough.” The quote from Peter Huntsman himself apparently comes from a subsequent interview with Reuters.
Another interesting moment in the call came from Andy Cash of UBS. He asked Huntsman is he was going to sell the textile effects and advanced materials units. “I believe those businesses are as profitable in our hands as they would be in anybody else’s,” Huntsman said. It is interesting that analysts are wondering such things.
Update: Huntsman today announced a $100 million share repurchase program, effective immediately.
Watching cable television you may have noticed the following commercial.
It is always neat to see the chemical industry in the popular media. It is neater to impress your friends and family with what you know about the chemistry that appears on television. They might not be so interested. I tried rousing my little girl out of bed when the commercial came on. “Come on, Daddy, I have school tomorrow,” was her response. No fun at all.
Anyhow, if you are curious: The Sasol-Huntsman plant is a maleic anhydride joint venture in Moers-Meerbeck, Germany. It has 60,000 metric tons of capacity, but it is being expanded by 45,000 metric tons in a project that will be completed next year. That would explain the giant thing rolling down the street.
The plant is on the Neiderrhein. I don’t know why it wasn’t floated in via barge. Maybe the Neiderrhein isn’t deep enough to handle the displacement of such a big heavy thing. Maybe there were too many things in the way on the shore near the plant.
A little follow up: LyondellBasell has emerged from bankruptcy on Friday as planned.
It has also filed a Form 10 with the SEC, a document that sheds some more light on what the new LyondellBasell will look like.
From that document, we learn that Apollo Management will have the largest stake in the company with 25% of shares. LyondellBasell’s former owner Access Industries will have 7% and Ares Management will have 7%. The Royal Bank of Scotland will have an unspecified number of shares, but they will amount to more than a 5% interest.
In addition, three of the five directors disclosed thus far have an Apollo pedigree, including one of Apollo’s founders, Josh Harris. The other two directors come from Access and Ares.
Apollo’s other major projects in the chemicals world are the former GE Silicones unit Momentive Performance Materials and the specialty chemicals maker Hexion. I would guess that there wouldn’t be a merger between Lyondell and one of these two firms because the synergies, outside of perhaps administrative costs, would be limited.
That said, the idea of combining LyondellBasell has been floated before. LyondellBasell tried to buy Huntsman before Hexion stepped in with a “better” offer that wasn’t, in the end, consummated. (Comical understatement in the last part of the preceding sentence).
But LyondellBasell is the second largest propylene oxide maker in the world, after Dow. Huntsman makes propylene oxide and other polyurethane raw materials like MDI. There isn’t nearly such an overlap between Hexion and LyondellBasell.
I am actually more curious about what the relationship might be with another firm that Apollo has a large stake in: Berry Plastics. That packaging maker buys billions of lbs of the kinds of plastics that LyondellBasell makes. Downstream integration is common in the vinyls world with many PVC makers also producing PVC pipe. In polyolefins, you hardly see it outside of biaxially oriented polypropylene, the plastic film that potato chip bags are made out of.
Another neat observation from the document: Four out of seven of LyondellBasell’s executive officers, including CEO Jim Gallogly, came from Chevron Phillips. Incidentally, Gallogly, who has experience founding global petrochemical companies, will end up with a 1% stake in the firm.