INDUSTRY SPECIAL..... Consolidation continues in speciality chemicals as Clariant courts Huntsman

Consolidation continues in speciality chemicals as Clariant courts Huntsman

Last week saw the announcement of one more mega deal with the planned merger of two equals: Switzerland headquartered Clariant AG and US based Huntsman Corporation, to create a new speciality chemicals company, HuntsmanClariant. On a pro forma basis, the combination will be a leading global specialty chemical company with sales of approximately $13.2-bn, an adjusted EBITDA of $2.3-bn, and a combined enterprise value of approximately $20-bn(including debt) at announcement. Hunstman is currently the larger of the two in terms of revenues with 2016 sales of $9.7-bn, compared to Clariant’s2016 sales of SFR 5.9-bn ($6-bn), but in terms of profitability Clariant is ahead. In 2016, the Swiss company reported gross profits of $1.8-bn, compared to $1.7-bn at Huntsman. This is not surprising as Clariant’s portfolio has a greater share of downstream, value-added chemicals, while Huntsman’s is dominated by more challenging businesses as polyurethanes. HuntsmanClariant will likely be the second largest pure-play speciality chemicals company in the world (behind Germany’s Evonik Industries AG, and on par with Germany’s Covestro – the spin-off of Bayer’s Material Science business). As per the structure of the deal it will be owned 52% by Clariant shareholders and 48% by Huntsman’s, and governed by a Board of Directors with equal representation from the two companies. $400-mn annual savings Savings from the deal are expected to be about $400-mn annually – about 3% of combined revenues – according to an official statement from the two companies. These savings are likely to come from integration of back office operations, procurement functions and savings on supply chain, logistics, warehousing. It is unlikely that there will be closures of manufacturing operations or significant retrenchment of manpower. 2017 – a record year for deals The all-stock deal is just the latest in a series in the fast-changing chemicals industry, where companies are striking ever more aggressive transactions to slash costs, gain economies of scale, consolidate portfolios, access adjacent opportunities, or widen their geographical footprint.Commoditisation across vast swathes of the speciality chemicals space is driving the need for consolidation amongst western companies that are also faced with slowly growing demand in their domestic markets. As of now, four deals, each valued between $40-bn and $70-bn are underway: Dow-DuPont (announced in 2015 and valued at $69-bn); and three deals announced in 2016 – Bayer-Monsanto ($66-bn); ChemChina-Syngenta ($47-bn) and Praxair-Linde ($43-bn). In comparison, in the last ten years, not one deal exceeded a ticket size of $20-bn. Furthermore, Dutch paint and coatings group Akzo Nobel is fighting an unwanted approach by US-rival, PPG, and is under pressure from influential shareholders to come to the discussion table. Wooed in the past Rumours of the Clariant-Huntsman deal surfaced about a couple of days before the formal announcement, but the two were rumoured to have had preliminary discussions that did not make much headway in the past due several issues including who would head the combined entity. Two years ago Clariant was also the target of an approach by German speciality chemicals company, Evonik Industries AG, but the deal did not go through. This time around the outcome has been different – indicative probably of the urgency of the situation. If all goes as planned, completion of the transaction is targeted for the end of the year. Any which way, 2017 will be a record year for M&A in chemicals. Right timing The management of the two companies have highlighted that the timing for the two companies to come together now is just right, as both have more or less completed an extensive recast of their business operations. But some analysts expect a counterbid for Clariant, which they believe could have an upside for its shareholders, compared to the deal they are getting from the merger. The two companies though have dismissed this possibility, highlighting instead the benefits the integrated operations could bring to shareholders in the years ahead. Little overlap in portfolio The portfolios of the two companies do not have much of an overlap, though there are some complementariness that the merged entity could benefit from. For example, Huntsman’s capacity to produce ethylene oxide and derivatives ties in with Clariant’s surfactants business that serves industries as diverse as personal care and oilfield chemicals, to name just two. Huntsman’s important portfolio of polyurethanes, to cite another example, serves the automotive industry, amongst others, as does Clariant’s masterbatches businesses for making plastics components. Given the little overlap in portfolios it is unlikely that regulators will scuttle the deal due concerns on market dominance. Extensive reorganisation at both As pointed out earlier, both companies have come through extensive reorganisation, involving significant restructuring of their portfolios. Clariant, for one, spun off the commoditised businesses of textile chemicals, dyes, paper & leather chemicals into Archromain 2012, and has also been in an acquisition mode. In 2011, in a significant departure from its earlier focus, it entered the catalyst business through an acquisition of global player, Sud-Chemie, and also made a string of bolt-on acquisitions in the personal care and masterbatches businesses – including in India. Last year, it acquired two Texas-based suppliers of chemicals for oil & gas extraction for about $360-mn, indicating its increased focus on the resurgent US market. In January 2016, Clariant created a separate subsidiary for its Plastics & Coatings business line, which included masterbatches, additives and pigments, leading some to speculate that the company was preparing to divest them to focus more on the more speciality parts of its portfolio. That did not happen and the business is still the largest segment, accounting for 43% of Clariant’s 2016 sales. Huntsman, on its part, has been looking for a merger partner for some time now. In 2007, it agreed to sell itself to a fellow chemical maker, Hexion, but the deal fizzled out in the aftermath of the financial crisis, and led to a legal spat between the two. It still has a plan to hive off its pigments and additives business (including titanium dioxide), known as Venator Materials, to leave behind a core that includes polyurethanes and advanced materials based on epoxy and acrylics. One area that could see some further action is the Textile Effects business at Huntsman, which comprises colorants and textile chemicals. The business has been under-performing for long, thanks to intense competition posed by Asian suppliers, leading to speculation that it is on the block. Considering Clariant disposed off similar businesses (to Archroma) it is hard to see this part of the portfolio staying for long in the combined firm. No tax problems Some analysts also see a ‘corporate inversion’ angle to the deal, at least in a colloquial sense, though not a legal one. This is a strategy employed by US companies (that typically pay higher rate of tax) to reduce their tax burden by having a foreign company buy its operations to then reincorporate abroad (in a lower tax regime).Such inversions to avoid taxes have been looked askance by the past US administration, which famously scuttled the acquisition of Irish pharma company Allergan by Pfizer in 2016. Any which way, the US Treasury Department considers a transaction an inversion only if US shareholders of the old company end up owning at least 60% of the new company. The Huntsman-Clariant deal does not meet those standards and will face no troubles on this front. Implications for India There are unlikely to be major manpower attrition due the merger in India, given the fact that the manufacturing presence of the two companies has virtually no overlap. Some rationalisation of supporting functions may however take place. Huntsman has manufacturing facilities in Ankleshwar (Performance Products), Chakan, near Pune (Polyurethanes), and at Vadodara (Textile Effects). Clariant’s site in Roha is now its most important manufacturing site in India, supplying several products, including for global supply chains. In addition, it has a pigments manufacturing site in Cuddalore (also a global site), one near Hyderabad for its ICS business (that came in through the acquisition of Vivimed’s personal care ingredients business), and three sites making masterbatches, (two of which have come through acquisitions). In addition, there are the SudChemie operations – part of a joint venture with an Indian partner – with two manufacturing facilities for catalysts. Amicable agreement The deal is remarkable for the amicable manner it which has been done and its structuring. The all-stock nature implies neither company has to spend cash to expand. It conserves energy and allows the management to stay focussed on running businesses, rather than staving off unwelcome suitors or bargaining for long over valuations. It is recognition by the two players that it is better to be part of a change one makes, instead of one they are forced to take.

- Ravi Raghavan

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