My Turn – Dr. Balaji B. Singh – Financial Buyers vs. Strategic Buyers – Impact on the U.S Chemical Industry
Is the ongoing bidding war for Huntsman Corporation and Huntsman International LLC yet another sign of the stage of maturity and the need for house cleaning in the mature, low-growth, sunset–chemical industry in North America???? – Something to think about. When the industry reaches a low growth mature stage and with a very high market share – it becomes a Cash Cow – an opportunity to milk it dry – that’s the incentive for most financial buyers.
You will see all winners in this venture – Access Industries – Basell; Apollo Management – Hexion and Huntsman; For more of detailed analysis – Please read our strategic analysis of the situation – enclosed.
Top 3 Reasons why you should attend FlexPO2007 in Bangkok:
Number 3 – First opportunity to meet major suppliers, Government, and downstream processors in Thailand- the Gateway to China;
Number 2 – Come and Meet your future customers – the downstream converting industry in Thailand, and ASEAN Countries;
Number 1 – Bangkok – Hospitality, Food, Tourism; The Future Growth and an Opportunity to meet future growth region.
For more information visit www.CMRHouTex.com
Basell to acquire Huntsman Corporation
Basell and Huntsman Corporation announced that they have signed a definitive agreement pursuant to which Basell will acquire Huntsman in a transaction valued at approximately $9.6 billion, including the assumption of debt. Under the terms of the agreement, Basell will acquire all of the outstanding common stock of Huntsman for $25.25 per share in cash.
The transaction was unanimously approved by the Boards of Directors of both Basell and Huntsman. Huntsman’s Board of Directors approved the transaction agreement at the recommendation of a Transaction Committee comprised of Huntsman independent directors. The transaction is subject to customary closing conditions, including regulatory approval in the U.S. and Europe, as well as the approval of Huntsman shareholders. Entities controlled by MatlinPatterson and the Huntsman family, who collectively own 57% of Huntsman’s common stock, have agreed to approve the transaction. Closing is expected in the fourth quarter of 2007.
The combined company will have an extensive geographic footprint, with operations on all continents of the world, and will be well positioned in fast-growing markets such as China, India, Eastern Europe, and Latin America. In 2006, Basell and Huntsman had combined revenues of more than $26 billion and employed approximately 20,900 people.
Comments: Please find enclosed our analysis of Basell’s acquisition of Huntsman Corporation.
Huntsman receives a higher offer from Hexion Specialty
Huntsman Corporation announced that it has received from Hexion Specialty Chemicals, Inc., an entity owned by an affiliate of Apollo Management, a proposal (the “Hexion Proposal”) to acquire all of the outstanding common stock of Huntsman for $27.25 per share in cash.
The Hexion Proposal is subject to the termination of Huntsman’s previously announced merger agreement with Basell AF and the execution of a definitive merger agreement with Hexion. The Hexion Proposal’s terms include that Hexion will have up to 12 months, subject to a 90-day extension in the judgment of the Huntsman Board of Directors under certain circumstances, to close the transaction and that the cash price per share to be paid by Hexion will increase at the rate of 8% per annum (inclusive of any dividends paid) beginning nine months after a definitive merger agreement is executed. The required financing for the Hexion Proposal is fully committed. Furthermore, the proposal does not include a financing condition. The Hexion Proposal also includes a $325 million reverse break-up fee payable by Hexion to the Company in the event the transaction does not close due to the failure to obtain regulatory clearance or requisite financing. The Hexion Proposal provides for a $225 million termination fee payable by Huntsman in the event of certain terminations by Huntsman in connection with the exercise by the Board of Directors or the Transaction Committee thereof of its fiduciary duties.
As announced on June 26, 2007, Huntsman entered into the Basell Agreement, under which Basell agreed to acquire all of the outstanding common stock of Huntsman for $25.25 per share in cash. The Basell Agreement may be terminated under certain circumstances, including if the Company receives a superior proposal and provides advance notice to Basell. If the Basell Agreement is terminated under these circumstances, Basell will be entitled to a $200 million payment. Hexion has agreed to directly fund $100 million of this payment, subject to reimbursement by Huntsman if the transaction with Hexion was not consummated in certain circumstances.
Comments: Please find enclosed our analysis of the potential acquisition of Huntsman Corporation by Hexion Specialty Chemicals.
Basell stopped producing polypropylene in Sarnia in 2008
Basell announced that it will stop producing polypropylene in Sarnia, Ontario in mid-2008. The plant is expected to continue normal operations until the time it ceases production.
Basell currently operates two polypropylene lines in Bayport, Texas, and is in the process of re-starting a third line at that site. The company also has two polypropylene lines in Lake Charles, Louisiana, and one in Varennes, Quebec. All of these units use Spheripol process technology. Basell’s joint venture in Mexico, Indelpro, operates a Spheripol process line and is building a new 350 KT Spherizone polypropylene plant at Altamira which is scheduled to start up in early 2008.
Comments: Basell had recently announced plans to restart a spheripol line in the US. It appears that Basell wants to shift the production from the older Sarnia plant to the newer line in the US. Basell has been extremely successful with its Spheripol technology and the products based on Spheripol technology are widely accepted in the industry. With this move, Basell is hoping to improve the operating rates of other plants while providing products based on newer technology.
INEOS Polyolefins to restructure PP at Sarralbe, France
Having already announced investment projects of more than EUR150M over the next three years, notably in high-density polyethylene (HDPE) at Lillo and polypropylene (PP) at Geel, INEOS Polyolefins announced its intention to further restructure its assets to ensure a robust production platform capable of maintaining its leading market position for the long-term.
Consistent with this strategy, INEOS Polyolefins intend to exit PP production on two of their three PP lines at Sarralbe in France. The two slurry lines have become unsustainable due to feedstock issues and their exposure to grades/markets unable to provide sufficient returns through the cycle.
PP production on Line 2 (165ktpa) is expected to cease by the end of 2008, after having transitioned key customers to our plants in Lavera, France (debottlenecked by 10ktpa in Q4 2006 to 300ktpa) and Grangemouth, Scotland (currently being debottlenecked by 50ktpa to 285ktpa). PP production on Line 1 (50ktpa) is expected to cease by the end of 2009, after having transitioned key customers to our plant at Geel, where copolymer capacity will be increased by 220ktpa to 500ktpa during 2009.
The third PP line (65ktpa) and all HDPE lines (200ktpa) at Sarralbe remain strategic to the Business, with unique technology enabling a strong portfolio of differentiated products.
Comments: Ineos (formerly Innovene) first started producing polypropylene at Sarralbe in 1974 and is currently the second largest producer of polypropylene in the world with a capacity of 2,535 KT accounting for 5.9% of the total global capacity. The company has polypropylene capacity in the United States, Belgium, France, and the United Kingdom. The total European demand for polypropylene was close to 10,400 KT in 2006 growing at 4.8% in Western Europe and 6.7% in Eastern Europe. With the capacity utilization at 88% and an increase in PP capacity in the pipeline.
The company’s move to close down the two polypropylene lines and move the production to other regions made better economic sense in utilizing available capacity and maintaining its market share.
SolVin, BASF & Sibur to build Russia’s first world-scale vinyl production plant
Solvay and SolVin, the joint subsidiary of Solvay and BASF for vinyl in Europe, announced that they have signed a joint venture agreement with Sibur LLC, an affiliate of Gazprom to build Russia’s first world-scale, fully integrated vinyl plant in Kstovo, in the Nizhny Novgorod region.
The completion date is set for 2010 with a total investment of EUR 650 million for the establishment of a total annual capacity of 330 KT of vinyl resin and 225 kilotons of caustic soda. The operation will serve the fast-growing markets in the Commonwealth of Independent States (CIS) and is designed to accommodate a possible expansion bringing total capacity to 510 KT of vinyl resin and 335 KT of caustic soda.
The plant will be supplied with ethylene delivered from the cracker owned by Sibur in Kstovo. The cracker will be expanded by our Russian partner to meet the plant requirements as well as its own internal needs.
To implement their agreement, SolVin and Sibur Holding will create a joint venture company, RusVinyl, of which each partner will hold 50%. In addition, SolVin has entered into talks with the European Bank for Reconstruction and Development, aiming at a possible EBRD involvement in the project.
The project benefits from the support of the authorities of the Nizhny Novgorod Region. Solvay is already present in Russia, through its activities employing more than 600 people locally as well as through a number of industrial and research partnerships.
SIBUR Group is the Russian largest vertically-integrated petrochemical holding. GAZPROM Group holds the controlling stake in SIBUR Holding JSC. The sole executive powers were transferred and are performed by the management company SIBUR LLC. The corporate center has 3 business units formed based on the similarity of the production processes and products. SIBUR also incorporates sub-holdings SIBUR-Russian Tyres JSC and SIBUR–Mineral Fertilizers JSC, which formerly were the business units.
Comments: Solvin is the second-largest producer of PVC resin in Western Europe. The company is headquartered in Brussels, Belgium. SolVin was set up in 1999 as a 75-25 joint venture between Solvay and BASF. In 2000, SolVin and Arkema established a production joint venture in Fos and Berre, France, by taking over the vinyl activities of Shell. In 2002, SolVin integrated PVC production activities located in Martorell, Spain, which had previously been owned by Solvay.
The growth of PVC is higher in developing countries such as Eastern Europe as compared to that Western Europe. To take advantage of the market growth, the company has decided to construct a vinyl complex in Russia.
INEOS agrees joint venture with LANXESS operate the ABS business
INEOS Group announced that it has agreed to set up a Joint Venture with LANXESS, the German chemicals and polymers group, through which it is to take over the operation of the LANXESS ABS plastics business, Lustran Polymers. On completion of the first stage, INEOS will pay LANXESS EUR35 million for a 51 percent majority share in a new business that is to be called INEOS ABS.
As part of the agreement, INEOS will then acquire the remaining 49 percent share in the new company, two years after the first stage of the deal closes, for a price based on the performance of the business in the two years.
Lustran Polymers is currently the world’s third largest and Europe’s leading supplier of ABS plastics, with sales amounting to almost EUR 900 million. On completion of the agreement, assets in Dormagen Germany); Tarragona (Spain); Map Ta Phut (Thailand); Vadodara (India); Addyston (USA) and around1600 employees are to transfer into the new company.
The acquisition is being made by INEOS Group Limited and is conditional on approval from the relevant antitrust authorities. The transaction is expected to close at the end of September 2007.
Comments: It seems that 2007 is the year of mergers and acquisitions of various Plastics Businesses around the world. We just heard about the Huntsman –Basell deal. Hopefully, this is a step in the right direction for both INEOS and LANXESS. This joint venture should help INEOS to establish strong market positions in a new portfolio of products, that complement its styrene, polyethylene, polypropylene, and PVC plastics activities. There may also be a good fit with a number of its existing businesses and the JV will benefit from upstream integration into key raw materials. For LANXESS, this joint venture or complete take-over eventually by INEOS provides an opportunity for realignment. Most importantly, the new management will provide the much-needed stability and support to both the Lustran Polymers business and its employees for further development. We hope the plastics industry and employees will benefit from these inevitable “merger/acquisition” activities!!!
Lanxess found a solution for its lackluster ABS polymers business LUSTRAN, which was loss-making for years. The announced JV will give INEOS a 51% stake for a first payment of EUR 35 million. A profit-linked second payment will be received once INEOS fully owns LUSTRAN two years after closing (approx. September 2009). INEOS produces important precursors to ABS and therefore can create significant synergies within the company.
BASF consistently grows its plastics business
BASF wants to further expand its strong position in the worldwide plastics business by firmly focusing its activities on customer and market requirements.
According to the company, since 2003, supported by the re-organization of our portfolio, it has been able to increase income from operations (EBIT) every year. The company plans to expand its plastics business with products offering differentiation potentials in the market. By 2010, BASF wants to increase the share of innovative products and specialties for specific sectors and customers from about one quarter to about 40 percent compared to 2006. The company intends to achieve this goal through partnerships with its customers. Driven by its high competence in research and development, applications technologies, and logistics, BASF intends to continue on its profitable growth path in the plastics business.
The company explained the strategy for expanding the plastics business and highlighted the competitive advantages enjoyed by BASF: (1) Concentration on areas of activity with sufficient differentiation potential in the market, (2) Continuous strengthening of efficiency, effectiveness, and innovativeness in all areas of business, (3) Consistent realization of growth potentials in new applications and new customer sectors, (4) Full utilization of the product and service portfolio, and (5) Positioning of plastics as energy efficiency materials. BASF has significantly strengthened its engineering plastics and polyurethanes business in recent years through investments and acquisitions. Sales of engineering plastics are therefore expected to grow at an average annual rate of 9% up to 2010, a level significantly above the market average. As regards styrenics, BASF has parted with sites and activities that are no longer competitive.
BASF is employing differentiated business models to allow it to tap even more profitably into the existing market segments. Polyamide intermediates, spinnable polyamides, styrene, polystyrene, ABS, and styrene-based foams are being marketed with the aid of a business model in which BASF presents itself to the customer primarily as a reliable and efficient supplier. More than 70 percent of plastics sales are currently being generated through this business model. For polyurethane basic products and innovative insulating materials like Neopor®, BASF anticipates above-average growth rates and is expanding its production capacities accordingly. Capacities for the production of Neopor® alone are to be trebled by the end of 2008.
Comments: It seems BASF is seriously committed to its Plastics Business and would like to march on a profitable growth path. Just like the industry leaders – Dow, ExxonMobil, and others, BASF is trying to find an innovative approach to get the maximum out of this matured business. It is a tough time for the plastics industry as a whole to make high-profit margins consistently every year. The key to a successful business is to stay ahead of the competition by bringing new products – more than “me too” types in the marketplace. To grow at above market rates while recognizing the inherent limitations of the Plastics Business, BASF is taking necessary steps – focusing on consistent customer orientation based on new business models and expanding specialties and innovative products. The global demand for plastics will continue at an annual growth rate of about 5 percent up to 2015. BASF would like to stay above the industry average by focusing on Asian markets where consumption has exceeded total demand.
PolyOne sells its interest in Oxy Vinyls to Occidental Chemical
PolyOne Corporation, a leading global provider of specialized polymer materials, services, and solutions, announced today that it has sold its 24 percent interest in Oxy Vinyls, LP (OxyVinyls) to Occidental Chemical Corporation (OxyChem), a wholly-owned subsidiary of Occidental Petroleum Corporation.
Under the terms of the agreement, PolyOne will receive cash proceeds of $261 million for the sale of its 24 percent interest in OxyVinyls. PolyOne will immediately use the proceeds to reduce debt, including the entire outstanding balance of $141.37 million in aggregate principal amount of its 10.625 percent Senior Notes due 2010. As a result of these actions, the Company projects lower interest costs of approximately $25 million in 2008 compared to 2006.
PolyOne will retain the existing polyvinyl chloride (PVC) resin and vinyl chloride monomer (VCM) supply agreements that it entered into when OxyVinyls was formed. The terms of the supply agreements, including extensions, run through 2024. These agreements ensure consistent, cost-effective raw material supplies that will enable PolyOne to maintain its competitiveness and pursue its strategy of providing value-creating material and service solutions to its customers.
In a related transaction, the Company will acquire OxyChem’s 10 percent interest in PVC Powder Blends, LP for $11 million, which will bring PolyOne’s ownership of this PVC compounding operation to 100 percent.
Comments: OxyVinyls was formed on May 1, 1999, by combining the PVC and VCM businesses of OxyChem and PolyOne to create one of North America’s largest suppliers of PVC resin.
PolyOne had announced a transformational strategy based on four key components: (1) specialization, which shifts the basis of competition to differentiation from cost/commodity; (2) globalization, which positions the Company to benefit from its extensive geographic reach; (3) operational excellence, which strengthens PolyOne’s capabilities by enhancing productivity, profitability, and efficiency in all phases of its business; and (4) commercial excellence, which mobilizes sales, marketing and innovation expertise to bring to market value-added products and services that provide a competitive advantage.
By securing the supply agreements, the company has ensured a steady raw material supply. However, it may face more pressure from increasing feedstock prices.
LANXESS invests in the global butyl rubber business
At its Canadian Sarnia site, Lanxess completed the first phase of a plant expansion that will increase its butyl rubber capacity there by 42 percent. LANXESS has already started a second phase of expansion at the Sarnia plant, increasing annual capacity by another 10 percent in 2009.
To satisfy the growing global demand for butyl rubber the company is also accelerating its expansion in Europe and Asia. At the Zwijndrecht, Belgium facility LANXESS already increased capacity by 10 percent in 2006. In addition, LANXESS announced plans last week to build a new butyl rubber facility in Asia. LANXESS projects an investment of a magnitude of EUR 400 million. Negotiations at three possible sites, Singapore, Kuantan in Malaysia, and Map Ta Phut in Thailand, will begin immediately. In the last several months, LANXESS has analyzed sites across Asia to assess their feasibility.
The Butyl Rubber Business Unit is a leading manufacturer in its field and belongs to the Performance Rubber segment, which achieved total sales in 2006 of EUR 1,776 million.
Comments: Butyl rubber is used in the inner tubing of car tires. Lanxess has a leadership position in the production and sales of halo butyl rubber (i.e. butyl rubber + chlorine and bromine). This is used in high-performance tires.
The company’s decision to invest in this market is based on several factors such as improving infrastructure (particularly in countries such as Asia) so that people can drive faster cars (and thus need high-performance tires). These high-performance tires claim to reduce gas consumption by about 30%. Given the strong global focus on the environment, this is also driving the trend toward such tires. As a result, Halobutyl enjoys not only strong global growth but also demands high margins.
As tire manufactures are continuously moving production to countries such as Asia (to take advantage of lower labor costs etc.), it makes sense that LANXESS follows the increasing global demand by being near its customers.
Kazakh-Russian Group Acquires 51% Stake in Petkim
A Kazakhstan-based consortium including a Russian financial investor TransCentralAsia Petrochemical Holding bid $2.05 billion to win a 51 percent state-owned stake in Turkish petrochemicals firm Petkim.
The sale is part of Ankara’s broad privatization program, which is backed by the International Monetary Fund. Turkey had already attracted $14 billion in foreign direct investment (FDI) in the first four months of the year, the government said in May.
Comments: Turkey has been trying to privatize its petrochemicals firm Petkim for some time now. After several attempts, it has been finally successful.
Brazilian company Braskem to produce ethanol-based polyethylene
Braskem, one of the leading petrochemical companies in Latin America and Brazil’s second-largest industrial company owned by the private sector, has announced the production of the first internationally certified polyethylene (PE) made from sugarcane ethanol. This PE has been produced using competitive technologies developed at the company’s Technology and Innovation Center.
The certification was conducted by a leading international laboratory, Beta Analytic, which certified that the product contained 100% renewable raw materials. The project is now in the technical and economic specification process and the startup of green HDPE production on an industrial scale is expected in late 2009. The new unit will have modern technology and a competitive scale and could reach an annual production capacity of up to 200 KT. The location and industrial design of the unit will be determined within the next few months.
The green HDPE developed by Braskem is the result of a research and development project that has already received some USD 5 million in investment. A portion of this amount was allocated to implementing a pilot unit for the production of ethane, which is the basis for the production of polyethylene, from renewable feedstock at the Braskem Technology and Innovation Center, which is already producing sufficient quantities for the commercial development of the product. The project’s target customer will soon receive the green polyethylene and have the opportunity to confirm the performance of the product, which can meet all of the quality standards required to be competitive in the international market.
Comments: Bio-ethanol, so far, has not had any major impact on the petrochemical industry. Ethanol has been mainly used for blending with gasoline and as a fuel in E85 vehicles. This is the first application for ethanol where it is used as a feedstock. There is no analysis comparing the cost-performance benefits of HDPE made from traditional feedstock and ethanol. In the next few months, we will have a much better understanding of the commercial viability of the new process. If the process proves commercially viable it may open up licensing opportunities for Braskem.
Brazil and the United States are the largest producers of bio-based ethanol. Brazil has been producing ethanol from sugarcane while the US has used corn as the key feedstock.
Contact us at ADI Chemical Market Resources to learn how we can help.