Issue Date: October 13, 2008
New Lease On Life
WHEN IT ENDED more than four years in bankruptcy earlier this year, the chemical maker Solutia won what its chief executive officer, Jeffry N. Quinn, calls a new lease on life. Now, with plans to sell off its nylon operations, Quinn wants to fashion Solutia into a highly profitable producer of performance specialties poised to take advantage of a growing solar energy market.
How Solutia got to where it is today is a decade-long story that has mesmerized many in the chemical industry. Back in 1997, Monsanto spun off its chemical operations to shareholders as Solutia before journeying on to become the preeminent agricultural biotech firm. Solutia took over a big chunk of Monsanto's outstanding debt, its chemical worker pension and health care obligations, and its environmental liabilities.
"Operating with those legacy liabilities was like trying to run a marathon with leg weights on," says Quinn, 49, who himself has run in the New York City and Boston marathons. "No matter how hard you train or how great your desire, if you are wearing 5 lb strapped around each ankle, you are going to have a hard time being competitive."
"The bankruptcy was our way of taking those leg weights off and casting them aside," adds Quinn, a lawyer and mining engineer who joined Solutia as general counsel in 2003 from a similar position at oil refiner Premcor. He became Solutia's president and CEO in 2004 and added the chairman's title in 2006.
When Solutia filed for bankruptcy protection at the end of 2003, it was spending more than $100 million annually on legacy liabilities. They included legal and remediation costs to clean up a former Monsanto manufacturing site and surrounding areas in Anniston, Ala., contaminated with polychlorinated biphenyls—suspected endocrine disrupters and carcinogens once widely used as a heat-transfer fluid in electrical transformers but not manufactured since 1971.
Solutia came out of bankruptcy at the end of February freed of the litigation costs surrounding the contaminant. Monsanto assumed those liabilities. Solutia retained what Quinn says are well-defined remediation costs, and it has set aside most of the funds it needs to fulfill its obligations to retirees.
Also shucked off during bankruptcy were businesses in contract pharmaceutical research and development, resins and additives for coatings and adhesives, and phosphonates for water treatment. What remain are three specialty products units that Quinn likes for their growth and earning potential and a nylon business that he laments is subject to the raw material pricing and supply whims of the petrochemical market.
Although Solutia booked a net loss in 2007, mostly from charges related to its bankruptcy reorganization, it is prospering now, Quinn says. Sales in the first half of 2008 were up 14%, to $2.1 billion, compared with the same year-ago period. Sales include the Flexsys rubber chemicals business for the entire first half of 2007, even though Solutia did not own all of it until May 2007.
Earnings before taxes for all of the firm's businesses except nylon increased 33% during first-half 2008 to $231 million. Nylon operations, which account for about half of Solutia's sales, swung from a profit of $59 million to a loss of $3 million during the same period. In July, Solutia hired investment bank HSBC Securities to "explore strategic alternatives" for the nylon operations. "Selling the nylon business would be a liberating event for our high-value specialty businesses," Quinn tells C&EN.
Solutia has wrestled with nylon for a number of years. In 2003, the business was mainly a supplier of nylon fiber to residential and commercial carpet makers. But as oil prices rose, so did prices for raw materials such as natural gas, propylene, and cyclohexane.
Solutia decided to shift production from commodity-priced carpet fiber used mostly in the U.S. to higher priced engineering resins that are in demand globally but especially in Asia. During the bankruptcy period, Solutia converted 350 million lb per year of fiber capacity to engineering resins used in everything from auto parts and conveyor belts to electrical connectors and tool housings.
The additional output gave Solutia's Pensacola, Fla., plant total resin capacity of 750 million lb per year and turned the firm into the second largest nylon engineering resin producer in the world after DuPont, Quinn says. The shift also dramatically improved the nylon unit's performance.
"Nylon went from making nothing in 2003 to a business that made $130 million in earnings before taxes and other expenses in 2007," Quinn says. But this year, as raw material prices rose dramatically and the U.S. housing and automotive markets slowed, Solutia saw "just how fundamentally different the nylon business is from all our other businesses," he says.
SOLUTIA'S SPECIALTIES businesses such as Saflex polyvinyl butyral glass interlayer, window films, heat-transfer fluids, and aircraft hydraulic fluids all will grow at twice the rate of the global economy, Quinn says. They also have operating profit margins above 20%. Even the rubber chemicals operation, once considered a poor performer, has similarly high profit margins, he notes.
But inconsistent profits in nylon have convinced Quinn that a business Solutia once considered a cash cow is just too risky. In the 12 months ending on June 30, Solutia recovered only about 70% of its overall raw material cost increases through higher prices to customers, he notes. Without nylon, Solutia was able to recover 130% of its raw material increases.
Quinn says logical buyers for the nylon assets include those already in the nylon resins business—firms such as DuPont, Rhodia, and BASF. Constantinos Karathanos, a stock analyst with Goldman Sachs, wrote in a recent investment report that he is placing his bets on buyers from either the Middle East or Asia.
A Middle Eastern deal would marry Solutia's nylon technology to a firm that could "leverage the region's favorably priced feedstocks and further integrate in propylene," according to Karathanos. Asian players might be interested in a business "that has already been exporting to this key growth region," he wrote. Either way, Karathanos figures the nylon business could fetch up to $700 million and reduce the firm's long-term liabilities of some $2.6 billion at the end of 2007.
According to Quinn, Solutia plans to make a decision on the nylon business by the end of the year. And the firm will likely consummate some type of deal by the end of the first quarter of 2009.
WITHOUT NYLON, Solutia would slim down to what Quinn says would be a $2.3 billion-per-year specialties firm. He is unconcerned about the possibility that Solutia could become an acquisition target. "If we can demonstrate to our shareholders that we can create the most value for them by remaining independent and growing from the strong base that we will have, we'll do that," Quinn says. "If we can create more value by being part of some strategic combination, we'll do that."
He notes the high prices acquirers are willing to pay for attractive specialty businesses even during the current credit crisis. Examples of recent deals include Dow Chemical's $18.8 billion bid for Rohm and Haas, Ashland's $3.3 billion play for Hercules, and BASF's $5.5 billion offer for Ciba. "Global leading, technology leading, high-margin, well-positioned businesses are the place to be," Quinn says.
Laurence Alexander, a chemical stock analyst with Jefferies & Co., agrees. "When Solutia emerged from bankruptcy in late 2007, the market judged it a work in progress," Alexander wrote in a recent report on Solutia. "From its December peak to the end of June, the shares declined by 40%.
"Step by step, however, Solutia has been transforming itself into a higher growth, higher return platform that should generate more stable cash flow streams over the next few years despite the broader economic cycle," Alexander wrote.
Quinn says he doesn't think the firm can completely buck a global economic slowdown, "but when you look at each of the businesses where we play, there are others that will be hurt first." Quinn is projecting earnings before taxes and other charges of about $400 million to $425 million in 2008 versus $376 million in 2007.
He is particularly enthusiastic about solar power and predicts that Solutia will have about $250 million in sales to that market by 2011. Among the products Solutia has already introduced is a solar version of the polyvinyl butyral (PVB) interlayer it sells to makers of architectural and automotive safety glass.
The new PVB improves the durability of thin-film solar panels, says Aristotelis Karagiannis, vice president of Saflex technology. The PVB is sealed between two layers of glass, where it protects embedded electronic components. PVB's good optical properties mean light still reaches the solar cells, and its adhesion properties help protect the glass against breakage.
Quinn notes that the thin-film solar-panel market is growing by 40% annually. PVB plant expansions in Belgium, China, Mexico, and the U.S. will position Solutia to beat out PVB competitors such as DuPont and the Japanese firm Sekisui Chemical, he says.
Solutia also stands to benefit from adoption of a different kind of solar technology—parabolic trough power plants that concentrate sunlight on a pipe filled with heat-transfer fluid. Just recently, Germany's Solar Millennium put in a purchase order for Solutia's Therminol VP-1, a eutectic mixture of diphenyl oxide and biphenyl. The heat-transfer fluid will be used in a plant under construction in Egypt. Heated up to 400 ºC, the fluid will create steam to generate 150 MW of turbine electric power.
According to Brian Kirtley, vice president of manufacturing and technology for Solutia's technical specialties business, the firm is working to refine Therminol VP-1, typically used in chemical and fiber manufacturing, so that it is ideally suited to parabolic trough power plants.
The firm's CPFilms business, mostly known for automotive and architectural films applied to window exteriors, is also developing flexible thin films for solar cells that power portable electronic devices, Quinn says.
Solar isn't the only growth market for a slimmed-down Solutia, Quinn emphasizes. CPFilms, for instance, had 2007 sales of $234 million into a global market he estimates at $600 million today. But only 1% of the world's window glass is protected by films, and Quinn believes that over the next few years the market will grow to three times its current size. The films, for instance, can be applied to tint limousine windows, reduce heat buildup in cars, and reject ultraviolet light to reduce fading of fabrics and carpeting in residential and commercial buildings.
Lisa Y. Winkler, director of product development and technology for CPFilms, says the unit will capture some of that growth through newly developed films. As an example, she describes a recently introduced safety and security film for car side windows designed to protect against thefts and to reduce injury to passengers from flying glass in case of an accident.
Quinn acknowledges that Solutia still faces an uphill run before it succeeds as a highly profitable maker of performance specialties. "Emergence from bankruptcy is not success in and of itself. It was never the destination; it was the milepost we were passing," he says. But reaching that milepost and positioning itself for growth means Solutia has created new opportunities. "Success is now up to us," Quinn says.
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