May 23, 2017
On May 22, 2017, Boards of Directors of Huntsman Corporation (NYSE: HUN, $26.15, Market Capitalization: $6.3 billion) and Clariant AG (SIX: CLN, CHF 21.59, Market Capitalization: CHF 7.2 billion) announced a definitive agreement to combine in a merger of equals through an all-stock transaction. The transaction will create a leading global specialty chemical company, to be named HuntsmanClarient, with ~$20 billion enterprise value at announcement. Huntsman will receive
48% stake in combined entity while Clariant will hold the remaining 52% stake. Huntsman shareholders will receive 1.2196 shares in HuntsmanClariant for each HUN share and each existing Clariant share will remain outstanding as a share in HuntasmanClariant. The transaction is expected to close by year end 2017, subject to Clariant and Huntsman shareholder approvals, regulatory approvals and other customary closing conditions.
HuntsmanClariant will have equal representation from Huntsman and Clariant. Hariolf Kottmann, current CEO of Clariant, will serve as a Chairman of the Board of HuntsmanClariant while Peter Huntsman, current President and CEO of Huntsman, will serve as the CEO. Patrick Jany, current CFO of Clariant will be the new CFO of the combined entity. Both CEO and CFO of the combined entity will be based in Corporate Headquarters at Pratteln, Switzerland while the operational headquarters will be located in The Woodlands, Texas.
HuntsmanClarient is expected to have a dual listing with SIX Swiss Exchange and the New York Stock Exchange. Beginning 1Q18, the new entity will start filing form 10-Q and 10-K with the SEC and will start reporting the financials in USD by following IFRS reporting standards. Citi and UBS AG are serving as Clariant’s financial advisors with Homburger and Cleary Gottlieb Steen & Hamilton serving as its legal advisors for this transaction. BofA Merrill Lynch and Moelis & Company LLC are serving as Huntsman’s financial advisors with Kirkland & Ellis, Bär & Karrer and Vinson & Elkins acting as its legal advisors.
On April 26, 2017, Huntsman had announced that the company is proceeding with an IPO of Venator Materials as against the previously announced tax-free spin-off. The company has confirmed that IPO of Venator is on track and is likely to be completed by July/August 2017 prior to the proposed merger between Huntsman and Clariant.
Valuation and Recommendation
As of now, we keep our previous valuation for Huntsman assuming the spin-off transaction which was based on the Form-10 dated 3/14. We will adjust our model to factor in the merger transaction and IPO of Venator and would assess the impact on target price and recommendation once there is additional certainty regarding the merger and IPO is available. Our previous valuation of VNTR, based on spin-off, implies a 82.2% value (or EV of $9.2 Billion for the HUN stub) and 17.2% (or EV of $2.0 Billion for the spin.) The SOTP is worth $11.2 Billion for Huntsman.
The all-stock merger between Huntsman Corp. and Clariant AG marks another landmark deal in the Chemical industry that capitalizes on cost synergies by eliminating the overlapping businesses & products. The merger will create a leading global specialty giant with FY16 pro-forma sales of $13.2 billion and adjusted EBITDA of $2.3 billion (17.2%) with current enterprise value in excess of $20 billion, including debt, and market capitalization of $14 billion as on the announcement date. The merger is expected to significantly enhance the financial performance of the combined entity through a robust combination of technology, products and talent with a total shareholder value creation of ~$3.5 billion, driven by an annual $400 million run-rate (~3% of FY16 pro-forma sales) in cost synergies expected to be achieved within two years of the deal closure. These cost synergies are primarily Operations related ($250 million) and Procurement related ($150 million) with additional, one-time cost synergies of $500 million and incremental tax savings to the tune of $25 million per year. Furthermore, the combination of businesses will help HuntsmanClariant to leverage on the overlapping customer base of the two entities and seek new revenue sources by tapping potential growth opportunities from complementary products in automotive end markets. The merged entity will have a balanced geographic footprint with an increased strength in North America and China. The combined entity will be well positioned for capital investments with strong balance sheet (2016 net debt/EBITDA of 2.2x) and cash flow generation (2016 Operating Cash Flow of $1.9 billion) capability. In addition, HuntsmanClariant expects to maintain Clariant’s current attractive dividend policy, implying a +12% jump in dividend per share based on last year’s payout. Furthermore, according to the legal experts, if the company had proceeded with the spin-off, it would have been a taxable transaction as Venator spin-off and Clariant acquisition would have been seen as a ‘part of a plan’ under Section 355(e). Add to that, the IPO offers de-leveraging prospect for the parent unlike the spin-off.
Huntsman Corp. (NYSE: HUN), based in the Woodlands, Texas, is a diversified manufacturer of differentiated organic and inorganic chemical products. The company operates in five segments: polyurethanes, performance products, advanced materials, pigments and additives, and textile effects. The products are used in a wide range of applications such as adhesives, aerospace, automotive, construction products, personal care and hygiene, durable and non-durable consumer products, electronics, medical, packaging, paints and coatings, power generation, refining, synthetic fiber, textile chemicals and dye industries. HUN manufactures products such as MDI, amines, surfactants, epoxy-based formulations, textile chemicals, and TiO2 and color pigments. On October 1, 2014, HUN completed a $1.28 billion acquisition of Rockwell Holdings Inc. which enlarged its pigments business portfolio with Performance Additives and Titanium Dioxide businesses of Rockwood. The company employs approximately 15,000 associates worldwide and recorded revenues of $9.6 billion in 2016.
Venator Materials Corporation (Spin-Off)
Venator Materials Corporation (NYSE: “VNTR”) is a leading global manufacturer and marketer of chemical products that improve the quality of life for downstream consumers and promote a sustainable future. The company’s products comprise a broad range of pigments and additives that bring color and vibrancy to buildings, protect and extend product life, and reduce energy consumption. The company markets products globally to a diversified group of industrial customers through two segments: Titanium Dioxide and Performance Additives. It is a leading global producer in many of the key product lines, including titanium dioxide, color pigments, functional additives, timber treatment and water treatment products. Venator operates 27 facilities, employ approximately 4,500 associates worldwide and sell products in more than 110 countries. For the twelve months ended December 31, 2016, Venator recorded pro-forma revenue and adjusted EBITDA of $2,139 million and $130 million respectively.
Clariant AG (SIX: CLN) is a Switzerland-based producer of specialty chemicals. It operates through four business areas: Care Chemicals, Catalysis, Natural Resources, and Plastics and Coatings. The Care Chemicals business area produces ingredients for laundry detergents, fabric softeners, disinfectants and dishwashing detergents, as well as plasticizers, de-icing fluids for aircrafts and runways, and special solvents. The Catalysis business area offers a wide range of catalysts for the petrochemicals, plastics and refining industries. The Natural Resources business area provides products and services to the minerals and oil and mining industries. The Plastics and Coatings business area produces color and additive concentrates and performance solutions for plastics, flame retardants, polymer additives and waxes for functional effects in plastics, coatings, inks and other special applications, as well as organic pigments, pigment preparations and specialty dyes. For FY16, Clariant reported the total revenue of CHF 5,847 million and adjusted EBITDA of CHF 898 million or margin of 15.2%.