Eastman Acquiring Solutia

Aiming to strengthen its business in several key market segments, broaden its range of technologies, and boost its Asia-Pacific presence, Eastman Chemical has signed an agreement to purchase Solutia in a transaction valued at $4.7 billion.

Eastman says the combination of cash and stock it is offering represents a 42% premium over Solutia’s stock price at the close of the market on Jan. 26, the evening before the deal was announced. Solutia had sales of just under $2.1 billion in 2011 and, adjusting for extraordinary items, racked up earnings of $243 million.

“This transaction provides Solutia’s shareholders with immediate value and an attractive premium, as well as the opportunity to benefit from the future prospects of a leading global chemicals producer,” says Solutia’s CEO Jeffry N. Quinn.

Solutia was spun off from Monsanto in 1997. Legacy liabilities such as retirement benefits, environmental remediation, and litigation weighed on the company in its early years. Solutia filed for Chapter 11 reorganization in 2003 and emerged from bankruptcy in 2008.

It has trimmed its portfolio since declaring bankruptcy. The company divested its stake in the Astaris phosphates joint venture in 2005, sold fine chemicals maker Carbogen Amcis in 2006, and unloaded its nylon unit, now known as Ascend Performance Materials, in 2009.

Last year, 43% of Solutia’s sales came from its interlayer business, which makes polyvinyl butyral (PVB) film used in safety glass for car windshields and building windows. Performance films, used for automotive window tinting, computer touch screens, and other applications, make up another 14% of Solutia’s sales.

The balance of Solutia’s revenues came from its technical specialties business. This unit, Solutia says, is the world’s largest supplier of insoluble sulfur, used as a rubber-vulcanizing agent.

Excluding unusual items, Eastman earned $652 million last year on sales of $7.2 billion. It makes polymers and solvents for the coatings, inks, and adhesives industries; fibers such as acetate tow for cigarette filters; a variety of specialty chemicals based on oxo and acetyl chemistries; and specialty polyester and cellulose polymers.

Eastman officials say Solutia will help Eastman make inroads into new markets. For instance, they say, Solutia’s strength in the tire market will help Eastman launch new hydrocarbon resin and cellulose ester technologies it has been developing to help boost tire performance.

Eastman will supply Solutia businesses with raw materials, which will help unlock the $100 million in annual cost savings Eastman is targeting with the purchase. Eastman makes or already buys eight of Solutia’s 10 biggest raw materials.

Solutia will also raise Eastman’s presence in Asian markets by about $1 billion, a 50% increase over its existing business in the region.

“The combination of Eastman and Solutia results in a pretty compelling value,” Eastman’s CEO, James P. Rogers, told analysts in a conference call. “From a strategic standpoint, the complementary and adjacent end markets, the combination of technologies and business capabilities, and the acceleration of growth in Asia-Pacific, specifically China, all make it clear that Solutia is a strong addition to Eastman.”

Wall Street analysts are positive about the deal for the same reasons Rogers noted. “Eastman appears to have taken a constructive strategic step in agreeing to acquire Solutia,” wrote Jeffrey J. Zekauskas, a stock analyst with J.P. Morgan, to clients.