Issue Date: March 12, 2007
With the sale of the last of its commodity chemical and polymer businesses, Huntsman Corp. is nearly done with its latest reinvention. Freed from businesses that are at the mercy of volatile petrochemical cycles and energy prices, Huntsman's managers see a more promising future.
This reinvention began more than a year ago when Huntsman rejected a $4.3 billion takeover offer from Apollo Management. Founder and Chairman Jon M. Huntsman believed the company could boost shareholder value without selling out. He and his son, Chief Executive Officer Peter R. Huntsman, decided the right approach was to separate the firm's commodity chemical side from its more value-added businesses.
Their original plan was to split Huntsman into two publicly traded companies. In the end, though, the company sold the commodity chemical businesses in pieces.
Last June, the company sold its butadiene business to Texas Petrochemicals for $262 million. In December, its European petrochemical business went to Saudi Basic Industries for $810 million. And last month, Huntsman agreed to sell its U.S. olefins, polyethylene, polypropylene, and expandable polystyrene businesses to Koch Industries for $761 million.
Peter Huntsman says the piecemeal sell-off made the most sense. He estimates that the stock market launch of a separate commodities company would have fetched around $1.5 billion, whereas the sale of the parts should take in more than $1.8 billion. Moreover, the company didn't have to go through the trouble of filing for a stock listing. "To be able to take these proceeds and apply them to debt reduction and keep our management team focused was absolutely the right thing to do," he says.
Debt reduction is a recurring theme for Huntsman, which has a history of dangerously leveraging itself. It flirted with bankruptcy in 2002 because of its high debt load. That year, the private equity firm MatlinPatterson bailed the company out by swapping some of the debt for a 49% equity stake. The bailout was followed in February 2005 by the company's initial public stock offering. Since then, its net debt has fallen by about 50% to $2.7 billion.
The divestitures have other benefits as well. At a meeting with financial analysts in New York City last month, Peter Huntsman pointed out that raw materials can make up 80–90% of the cost of producing basic chemicals such as polyethylene, polypropylene, and ethylene. Divesting these businesses has left the company less sensitive to the "massive capacity" coming onstream in the Middle East and Asia, areas that have lower cost raw materials versus North America or Europe. "We don't want to have to be crushed by this tidal wave," he said.
Analysts aren't as excited about the transition as Huntsman's management is. Jeffrey J. Zekauskas, an analyst with JP Morgan, says the company still has a long way to go before its stock price reaps the benefits of exiting commodities.
The divestment program "reduces its commodity exposure and should facilitate the upgrade of its business mix," Zekauskas wrote in a recent report to investors. But he noted that Huntsman still needs to improve the profitability of its businesses versus industry peers like Dow and Rohm and Haas. He added that the company's debt burden is still relatively high and that it still makes cyclical products such as titanium dioxide and ethylene glycol.
For its part, the company maintains that it is now more in control of its own destiny and that it can increase revenues while improving profitability.
Huntsman's largest business is its polyurethanes unit, which sells methylene diphenyl diisocyanate (MDI), propylene oxide, and polyols. The global market for MDI, the company's key product in this sector, is expanding at an annual rate of 7.1%. One growth driver is construction, where MDI is used in insulation and as a binder for composite lumber products.
The firm's performance products business makes maleic anhydride, surfactants, and amines. The company calls the maleic anhydride portion, which generated some 27% of the business unit's before-tax profits in 2006, its best business.
Huntsman's materials and effects business consists of epoxy resins and textile chemical operations acquired from Ciba Specialty Chemicals. The business is home to Huntsman's most ambitious technology platforms, including its new High IQ line of dyes, which it calls the "first new dyes to be introduced in 50 years." Garments dyed with them retain their off-the-rack color longer than garments colored with other dyes, Huntsman claims.
The smallest Huntsman business makes the white pigment titanium dioxide, an industry, Peter Huntsman says, in which restructuring is needed. "That is an industry where I believe one or two consolidations are taking place," he says. "And I think that will benefit the entire industry."
Though the company is completing a significant transition, it is not ruling out further acquisitions. "Acquisitions are in the DNA of this company," says Peter Huntsman. Instead of mega-transactions such as its 1994 acquisition of Texaco Chemical or its 1999 purchase of much of ICI, the company is now focusing on smaller deals. One area of focus, he says, will be "bolt on" acquisitions, on the order of tens of millions of dollars. Another focus, he says, will be entire company divisions such as the Ciba textile chemical unit.
But too much moderation seems unlikely for Jon Huntsman, who built his company through heavily leveraged buyouts. Indeed, Huntsman told C&EN that his company is more open to deal making than it has been in a while. "We held off on it for the most part for the last several years," he says. "Now that our balance sheet is becoming much more attractive, companies that we would go after would be the companies with the greatest synergies with us."
At the same time, the company seems to be emphasizing R&D for its existing businesses. It spent $115 million on research in 2006, a $20 million increase over 2005, although it is only 1.1% of sales. Peter Huntsman promises to boost R&D spending. "We will spend more on R&D in 2007 than in any year in the history of the company," he says.
Although Huntsman has sold businesses before, the ones going this time are among its oldest. But Jon Huntsman says he isn't particularly sentimental about selling facilities like these. He now sees them as mere stepping stones on the way to the current specialty-oriented Huntsman Corp.
"It was a matter of working your way from nothing into a chemical company that can be world renowned for its innovative products and technology," he says. "We have waited for the time—almost four decades—when we can have a true international impact on the market."
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