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Kraton To Acquire Arizona Chemical

Odd Couple: Firm claims market overlap despite different chemistries

by Alexander H. Tullo
October 1, 2015 | A version of this story appeared in Volume 93, Issue 39

In an unusual combination of businesses, Houston-based Kraton Performance Polymers, a specialist in styrenic block copolymers, has agreed to acquire the pine chemicals giant Arizona Chemical for $1.4 billion.

Credit: Shutterstock
By purchasing Arizona, Kraton will diversify raw materials away from oil.
Pine trees to illustrate pine chemicals
Credit: Shutterstock
By purchasing Arizona, Kraton will diversify raw materials away from oil.

Arizona is the world’s largest producer of pine chemicals. The company upgrades the papermaking by-products crude tall oil and turpentine into derivatives such as rosin and terpene resins.

Arizona generated $192 million in pretax earnings on $938 million in sales last year. The company was International Paper’s chemical unit until 2007, when it was purchased by the private equity firm Rhône Capital. Its current owner, American Securities, acquired Arizona in 2010.

The announcement comes only a week after the unveiling of another major pine chemicals deal: Symrise’s $420 million purchase of the terpene chemicals maker Pinova.

Kraton, which earned $147 million before taxes in 2014 on $1.23 billion in sales, has been looking to do a deal. Last year the company struck an agreement to merge with the styrenic block copolymers business of Taiwan’s LCY Chemical but walked away months later.

Although Arizona and Kraton make products that are chemically different, more than 50% of Arizona’s sales come from markets in which Kraton also participates, according to Kraton CEO Kevin M. Fogarty. Both companies, for example, make asphalt additives and adhesive ingredients. And the two firms both have a presence in lubricants and oil-field chemicals.

“We believe this is a compelling, transformational transaction for Kraton, extending our technology and market diversification, while substantially increasing our profitability,” Fogarty told analysts in a conference call when the deal was announced last week.

Kraton executives say the combined company should be able to reduce annual costs by $65 million.

In a note to clients, UBS stock analyst John Roberts accepted Fogarty’s arguments that the deal would improve profit margins for Kraton and that important markets overlap. Roberts also noted that the deal will lessen Kraton’s reliance on oil-based feedstocks, although end-market risks are similar for both companies. “Carbon is carbon, whether it comes from oil or wood,” he wrote.



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