Lyondell to Merge with Millennium

In a deal that will create the third largest publicly traded U.S. chemical company, Lyondell Chemical will merge with its Equistar Chemicals partner, Millennium Chemicals, through a stock swap.

The transaction values Millennium--which had $1.7 billion in sales last year--at $2.3 billion, including $1.3 billion in debt. Based on 2003 results from Lyondell, Millennium, and Equistar, the combined company's 2003 revenues were more than $11 billion, putting it behind Dow Chemical and DuPont among U.S. chemical firms.

The agreement will be structured as a trade of between 0.95 and 1.05 shares of Lyondell stock for each share of Millennium, depending on Lyondell's stock price prior to the deal's expected close in the third quarter.

Lyondell will take over Millennium's 29.5% stake in Equistar Chemicals, which had sales last year of $6.5 billion. Equistar was formed in 1997 and 1998 when Lyondell, Millennium, and Occidental Chemical combined their olefins and polyolefins businesses. In 2002, Occidental sold its 29.5% share to Lyondell in exchange for Lyondell stock.

Lyondell CEO Dan F. Smith, who will run the combined company, says that enjoying more of the fruits of an expected cyclical improvement in petrochemicals is a key rationale for the deal. "After closing, each shareholder will have the full benefit of the ethylene cycle," he says.

The deal will also give Lyondell the second largest titanium dioxide business in the world, behind DuPont's. Unlike in 2000, when Lyondell sold the polyol business that it acquired with the purchase of Arco Chemical, Lyondell says it will hold onto TiO₂, which it says adds a less cyclical, global business to its portfolio. Lyondell compares TiO₂ to its propylene oxide business, which also provides geographic balance for a company that is dominated by North America-focused Equistar. "In the long run, the most important aspect of this combination is the contribution toward building a stronger portfolio for our combined shareholders," Smith says.

That portfolio will also include Millennium's large vinyl acetate and acetic acid businesses, which the companies say will be easily integrated with Equistar. However, Millennium's terpene-based flavors and fragrances business is already on the selling block and attracting interested buyers.

The companies expect integration synergies to lead to $50 million in annual savings, a far cry from the $350 million in savings that the companies enjoyed from the original formation of Equistar. Lyondell's headquarters will remain in Houston.

"Great" is what Robert J. Bauman, vice president for petroleum and chemicals at the chemical consultancy Nexant Chem Systems, calls the timing of the agreement. "We believe we passed the bottom of the cycle, and the only way to go is up."

Financial analysts, however, are less excited. Merrill Lynch's Don Carson says the transaction is neutral for Lyondell shareholders and favorable for Millennium shareholders, adding that the deal offers "few strategic benefits to Lyondell."

Lyondell, before the Millennium merger, is already strapped with more than $4 billion in debt, much of it from the Arco Chemical acquisition. In fact, Standard & Poor's gives both Lyondell and Millennium "junk" credit status. Debt-rating service Fitch Ratings is worried that Lyondell's creditworthiness will slip after the transaction because of the prolonged chemical downturn, the deterioration of Millennium's credit in recent years, and the $50 million to $60 million in new dividends that Lyondell will have to dole out to Millennium shareholders.