Cytec Examines “Options” For Coatings Resins
Oct25

Cytec Examines “Options” For Coatings Resins

Cytec Industries CEO Shane Fleming dropped an “O” bomb on Cytec's coatings resins business during a conference call last week. “We are committed to maximizing value creation in this segment and will take the decisions necessary to do so,” he said. “We are currently reviewing all options for this business and we will provide a further update on our plans no later than our earnings guidance on our fourth quarter conference call.” “Reviewing options” always indicates that a company is entertaining the idea of selling a business. However, it doesn’t always mean that the company will end up selling the business. They often keep parts of the business and sell off and/or close other bits of it. The coatings resins business generated operating earnings of $68.2 million on $1.4 billion in sales last year. It makes resins for powder, radiation curable, and liquid coatings. It is Cytec’s largest segment by a mile, representing 52% of its 2010 revenues. Its profit margins, at just under 5%, are also the company’s thinnest, with Cytec earning a total operating profit margin of about 10%. During the conference call, Fleming said he expects the company to make $57 million to $60 million in operating income on about $1.6 billion in sales. Fleming did keep the door open to making the business work within Cytec, primarily through favoring specialty resins over more commoditized products. “We’ve got a portion of our coatings resins product line right now that’s just now meeting our return on capital,” he said. “That is out first goal. It’s to get the business to a point where it’s doing that.” For example, in the conference call, Cytec also disclosed it is closing a powder coatings resins plant in Suzano, Brazil, and took a $9 million charge in the third quarter for this shutdown. But Fleming said that separating the good parts from the bad parts might not be so easy. “You can identify the product areas where you’re covering the cost of capital and generating reasonable earnings,” he said. “But the pragmatic question is, can you pull those apart and operate them separately given the level of entanglement with the asset base?” Sounds like Cytec might punt that problem to the next owner. Cytec’s coatings resins business is a bit of a hot potato. It was originally part of Hoechst under the name Vianova Resins. Hoechst sold the business to Morgan Grenfell Development Capital in 1998 for $545 million. Solutia bought the business a year later for about $617 million. In early 2003, Solutia sold the business to Belgium’s UCB for $500 million. It had earned $22 million for Solutia on...

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Notes On Tronox/Exxaro
Sep30

Notes On Tronox/Exxaro

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...

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LyondellBasell Selling French Refinery

Lyondell has hired an investment banker to help it sell its refinery in Berre, France. Lyondell bought the refinery in 2008 from Shell for $700 million. The 105,000 bpd refinery “has not fulfilled economic projections made at the time of the acquisition,” the company says. It isn’t like they gave it a lot of time to work. OK, who am I kidding? Lyondell’s refining segment, which also includes its 292,000 BPD refinery in Houston, lost $2.4 billion in 2008, and $360 million in 2009. It managed to pull in a $242 million profit in 2010 on $15 billion in sales. All of Lyondell’s business have greater operating profit margins than refining. Lyondell is keeping the ethylene cracker, polyethylene, and polypropylene plants on the site. It so happens that I visited Berre in the late 1990s. A plant manager or someone—I’m not totally sure because he spoke only French—gave me a personal tour. We stood on a high promontory, he struck Napoleonic poses with his hand on his tummy and kept on saying “voilà.” Anyhow, Elenac—the BASF/Shell polyethylene joint venture that is now a part of Lyondell--was constructing a plant at the site when I was there. I think there was something happening to a Montell polypropylene plant while I was there as well. My point is that the polyolefins plants are probably in good shape because they are relatively new. I do wonder what Lyondell will do with the Houston refinery. It has been a part of Lyondell since the company was spun off of Atlantic Richfield in 1985. For most of those years, it was a joint venture with Venezuelan state oil company PDVSA and made gasoline for Citgo stations. Lyondell bought out PDVSA’s share of the JV in 2006. The refinery gets crude under contact from PDVSA. Obviously, that isn’t a great position to be in. It got less than half of its supply from PDVSA in 2010. I recall it received much more of its feedstock from PDVSA a decade ago. Interestingly, that contract is up in July. I’m curious to see what...

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Berkshire Details Sokol’s Lubrizol Scandal

Berkshire Hathaway has put out a report on top exec David Sokol’s resignation in March over shares he purchased in Lubrizol before Berkshire’s takeover was announced. At the time, I was wrong on this blog when I said: “This seems to me a case of an appearance of conflict of interest rather than a real conflict of interest. Sokol thought Lubrizol was a good investment. He suggested that it would be a good investment for his company, too. Engineering an entire deal to make a tidy—albeit $3 million—profit would be the tail wagging the dog.” Turns out, according to the report, there was more to the story than that: He did not disclose: * the amounts and timing of his purchases; * the fact that he bought the shares after discussing Lubrizol with Citi and after Mr. Sokol had narrowed the bankers’ initial list of 18 chemicals companies to one, namely Lubrizol; * the fact that Mr. Sokol had bought shares after Mr. Sokol (acting as a senior representative of Berkshire Hathaway scouting acquisition candidates) had asked for Citi’s help arranging a meeting with Lubrizol’s CEO to discuss Lubrizol and Berkshire; and * the fact that Mr. Sokol bought shares after learning that Citi had discussed his request for a meeting with Lubrizol’s CEO, who told Citi that he would discuss Berkshire Hathaway’s possible interest in a transaction with the Lubrizol board. Though, the report suggests that Sokol won’t have to exchange his pin stripes for prison stripes. We appreciate that at the time Mr. Sokol traded, he did not know whether Mr. Buffett would support, or reject, the idea of an acquisition of Lubrizol. We also recognize that Mr. Sokol did not know how Lubrizol would respond to an acquisition proposal if Berkshire Hathaway were to make one. We recognize the view that those uncertainties might have kept Mr. Sokol’s information below the level of probability required to support a finding of materiality for purposes of finding a violation of federal insider trading law. But the Trading Policy requires a higher standard of conduct than what is required to avoid being charged with a federal securities violation. I like the last sentence. It reminds me of the old Hebrew National commercials. My take: Why would someone blow their chance to be Warren Buffett’s successor for a measly $3 million? Berkshire doesn’t disclose Sokol’s salary or stock holdings in its proxies. In any case, I’m sure he’ll land on his...

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Berkshire Exec Resigns (Apparently) Over Lubrizol Bid

Some of you may have heard the news that Berkshire Hathaway executive David L. Sokol has resigned. Sokol bought 100,000 shares of Lubrizol and suggested to Buffett that Berkshire buy the whole company. Here’s the Lubrizol-related excerpt from Buffett’s statement about the resignation: Finally, Dave brought the idea for purchasing Lubrizol to me on either January 14 or 15. Initially, I was unimpressed, but after his report of a January 25 talk with its CEO, James Hambrick, I quickly warmed to the idea. Though the offer to purchase was entirely my decision, supported by Berkshire’s Board on March 13, it would not have occurred without Dave’s early efforts. That brings us to our second set of facts. In our first talk about Lubrizol, Dave mentioned that he owned stock in the company. It was a passing remark and I did not ask him about the date of his purchase or the extent of his holdings. Shortly before I left for Asia on March 19, I learned that Dave first purchased 2,300 shares of Lubrizol on December 14, which he then sold on December 21. Subsequently, on January 5, 6 and 7, he bought 96,060 shares pursuant to a 100,000-share order he had placed with a $104 per share limit price. Dave’s purchases were made before he had discussed Lubrizol with me and with no knowledge of how I might react to his idea. In addition, of course, he did not know what Lubrizol’s reaction would be if I developed an interest. Furthermore, he knew he would have no voice in Berkshire’s decision once he suggested the idea; it would be up to me and Charlie Munger, subject to ratification by the Berkshire Board of which Dave is not a member. As late as January 24, I sent Dave a short note indicating my skepticism about making an offer for Lubrizol and my preference for another substantial acquisition for which MidAmerican had made a bid. Only after Dave reported on the January 25 dinner conversation with James Hambrick did I get interested in the acquisition of Lubrizol. Neither Dave nor I feel his Lubrizol purchases were in any way unlawful. He has told me that they were not a factor in his decision to resign. Dave’s letter was a total surprise to me, despite the two earlier resignation talks. I had spoken with him the previous day about various operating matters and received no hint of his intention to resign. This time, however, I did not attempt to talk him out of his decision and accepted his resignation. This seems to me a case of an appearance of conflict of...

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A Good Take on Berkshire/Lubrizol

Peter Mycroft Psaras at Mycroft Research posted a great analysis of the Berkshire/Lubrizol deal on Seeking Alpha. He uses Buffett’s favorite measure—owner earnings—to assess the deal. Mycroft points out that Lubrizol stands out as among the best in the chemical industry by that metric.

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