A New Era for Huntsman

Huntsman Corp. built itself by purchasing chemical plants from oil and chemical companies that were happy to sell their less glamorous assets. The deals were win-win propositions in which Huntsman raked in profits during economic peaks and the selling companies were free to pursue different strategies.

The most recent economic trough was difficult for Huntsman, however, and it was forced to sell a sizable piece of itself to MatlinPatterson Global Opportunities Partners. The transaction saved the firm from bankruptcy and led to an event that the Huntsman family had hoped to put off: an offering of stock to the public, or IPO.

The stock offering, launched in February, was a success. Shares sold for $23, the top of Huntsman's targeted range of $21 to $23 per share, and the company sold 60.2 million shares, many more than it expected. It raised some $1.45 billion in net proceeds, which it used to lower its debt to $4.5 billion.

Peter Huntsman says his company's IPO had strong appeal to investors. "We had a management team with managers who have been in the business for decades. We had a clear vision of our priorities of debt reduction and debt repayment over the longer term. We had a very competitive portfolio of both growth-oriented products and commodity-oriented products," he says. "All of those hit home."

So far, analysts have been receptive to Huntsman. Donald D. Carson, chemical analyst with Merrill Lynch, gives it a buy rating. "Huntsman has significant operating leverage to the emerging recovery in the ethylene cycle, which is shaping up to be longer and stronger than expected," he wrote in a report last month. "Huntsman is more than just an ethylene play, however. The company also has significant earnings growth potential in differentiated businesses like methylene diphenyl diisocyanate (MDI)."

The Huntsmans have always prided themselves on what they were able to accomplish as a private company. They also reveled in some of the benefits of being private, such as the free hand that comes from not being obligated to outside investors.

Peter Huntsman says life as a public company is not fundamentally different. "I have the same objective as our shareholders do, and that is to create value," he says, adding that he is still one of the biggest investors in the company.

HUNTSMAN'S TROUBLES began after its 1999 purchase of ICI's polyurethane, petrochemicals, and titanium dioxide businesses for $2.8 billion. By 2002, the company was on the verge of bankruptcy. But even though the purchase added a lot of debt, Peter Huntsman says the acquisition wasn't a misstep. "The ICI acquisition has always had strong cash flows associated with it," he says.

In fact, Huntsman says the only deal he'd like to take back is the 1997 purchase of Rexene for $600 million. That company was launching a novel flexible polyolefin product that turned out to be a bust. "We were told that customers were using it, and in reality, no one had even qualified the product," Huntsman recalls. The company wrote off more than $500 million. "Had we never purchased Rexene, our life would have been a lot different," he says.

According to Peter Huntsman, part of the problem was that the acquisition was a departure from Huntsman's usual strategy of buying from friendly companies that allow it to investigate the division or business up for sale. Rexene was a hostile takeover, and thus Huntsman had little chance of going over the company's books. "That is the only hostile takeover we ever did, and that's the last one we'll ever do," Huntsman says. "We learned our lesson."

Adding to Huntsman Corp.'s woes was one of the deepest troughs the chemical industry faced, in 2001. Peter Huntsman notes that the Huntsman-ICI business was a separate legal entity from Huntsman LLC, the company with the large debt burden. As a result, Huntsman couldn't draw needed funds from Huntsman-ICI. "If we had everything under one financial umbrella at the time, we probably wouldn't have gone through any restructuring; we probably would have taken money from those operations at ICI and covered some of the shortfalls we were experiencing in the Rexene acquisition," he explains.

Enter MatlinPatterson, which bought up Huntsman debt for 11–40 cents on the dollar. In 2002, it swapped some $750 million in Huntsman debt for a roughly 49% equity stake in the company. It also helped Huntsman buy out the 39% stake in Huntsman International that Huntsman didn't own and merged Vantico, the former Ciba Specialty Chemicals epoxies business, into Huntsman.

Peter Huntsman says it is possible that Huntsman could have struck a similar deal with another investor. With MatlinPatterson, though, the Huntsman family was able to keep control of the company. "I'm much happier with the deal that we have with MatlinPatterson, not just from a financial point of view but from an operating point of view," Peter Huntsman says. "They have been excellent partners. They'll make a billion-plus dollars on the investment. They'll do extremely well. They deserve it."

It is likely that large Huntsman investors, including MatlinPatterson, will cash out in a secondary equity offering as early as this year. Merrill Lynch's Carson says that a potential sell-off and uncertainty about the U.S. and Chinese economies are the two major risks looming for Huntsman's stock price.

Peter Huntsman says acquisitions will not be a big part of the company's strategy in the short term. "It has to be an unbelievable or an unrealistic acquisition to get our interest today," he says. Instead, the company's highest priority is paying down $2 billion in debt over the next three years. Huntsman says asset sales won't be a big part of that debt reduction, noting that the company has already sold businesses such as styrenics and packaging.

Huntsman is expanding many of the businesses it has retained. Prompted by high demand, the company last month announced plans for MDI expansions at plants in Geismar, La., and Rozenburg, the Netherlands, by the end of 2006.

The company is involved in a joint venture in Caojing, China, that is building an MDI plant. Peter Huntsman says the company, known for buying rather than building plants, needed capacity on the ground in China, where demand for polyurethane has been growing by some 20% per year. "You can't acquire polyurethane capacity in China, because it doesn't exist," he says.

Business conditions in the TiO₂ industry could be better but are improving, Peter Huntsman says. "As far as building a new line today with today's margins in TiO₂, I don't see an incentive," he says. In fact, the company has closed some TiO₂ capacity at its Grimsby, England, and Umbogintwini, South Africa, plants.

Huntsman's TiO₂ plants mostly use the sulfate process, which is expensive compared with the more modern chloride process. However, he doesn't think the sulfate capacity weighs down the business, insisting that Huntsman is cost-competitive in Europe, where most of its capacity is located.

Peter Huntsman calls the company's surfactants unit "somewhat of a disappointing business." He says linear alkylbenzene is sold primarily to big cleaning product makers, such as Procter & Gamble and Colgate, that have the ability to use detergent alcohols instead. Peter Huntsman says the company is increasingly targeting more specialized applications for surfactants such as mining, agrochemicals, paper, and water treatment.

In contrast to surfactants, he says the unsaturated polyester resin raw material maleic anhydride is the company's top-performing product, growing at double-digit rates. He says the company enjoys the lowest cost position in the marketplace and is the biggest licensor of maleic technology.

In polymers, Huntsman is building a high-pressure, low-density polyethylene plant in Teesside, England. The plant, which is expected to start up in 2007, will be low cost by virtue of its large economies of scale. Moreover, the plant gives Huntsman a home for ethylene made at its Wilton cracker, one of the lowest cost facilities in Europe. Many of Huntsman's traditional British customers have closed down, and without the LDPE unit, it would be forced to ship ethylene to continental Europe.

Peter Huntsman's tenure as CEO, a job he took in 2000, promises to be different from that of his father. Peter Huntsman says he's a more detail-oriented person than his father, who is more of a big-picture man.

THERE ARE OTHER differences, too. "My father would be more of a deal junkie than I would be, certainly," Peter Huntsman says. "Dad, in building the business, bet the farm four or five times. If some of those early acquisitions had not gone exactly the way he intended them to, the whole thing would have collapsed."

Peter Huntsman says you can no longer build a chemical company as his father did 20 years ago: by putting up less than a million dollars of his own cash to buy an old Shell polystyrene plant. There are too many barriers such as global trade, environmental regulations, and bigger competitors. "We just started out with nothing, literally, in the business, and built it into something," Huntsman says. "It would be next to impossible to do that today."

One trait that Peter Huntsman shares with his father is a willingness to speak his mind. The mere mention of natural gas in his presence engenders a lecture on how most natural gas traders don't actually use the stuff and are driving prices up to steal a quick profit. "They are just guys in a circle that trade paper back and forth," he complains.

"If it were coffee beans or something that was affecting the price of a cup of cappuccino, that's one thing," he continues. "But we have driven out in excess of 100,000 jobs in this industry since 2000." Huntsman would like to see the government step in and reduce the volatility in the natural gas market.

Peter Huntsman isn't going to clam up now that the family business is public. "If shareholders don't like it, then they probably ought to get a new CEO," he says. "I'm not going to tie up my tongue over this job." But, he insists, whatever he says will be in the best interest of the company.