HUN/ROC Consolidation in Part In Response to China – The First of Many?
We have written recently about the need for developed market producers of many different commodity products to take pro-active steps to address the significant build up of capacity in China. Today we see such a move from Huntsman and Rockwood, combining their TiO2 businesses. Huntsman will buy from ROC for around $1.25 bn – cash and assumed liabilities – and then, once integrated, spin the combined business into an independent company which in 2012 had approximately $2.5bn of combined sales.
TiO2 is one of several products facing increased global competition from new entrants, mainly in China, but also in other regions. We would include aluminum, some organic chemicals and polymers and potash in this group, with the chemicals and polymers issue exacerbated by expected building in North America.
Huntsman will likely spend 12 months or so integrating the two businesses and possibly rationalizing capacity prior to taking the company public in order to improve the expected performance of the new venture. In situations like this, grade rationalization can make significant improvements to cost structures and returns (limiting the number of different products made on each plant because you have more plants).
The initial transaction will allow ROC to focus on its core Lithium and Surface Treatment businesses and the company will likely become an interesting target for others without the commodity piece – no buyer of the core business would have wanted TiO2. ROC has screened as very inexpensive in our valuation work, mostly because of the drag of TiO2.
Huntsman will be able to drive synergies in the combined business, hopefully resulting in a higher market value per pound of capacity at the point of a public offering than agreed today and once the spin is concluded will also be able to focus on higher value added businesses with lower cyclicality. HUN may also then become an interesting target.
There are some implications for DD in this transaction. The value per dollar of sales is well below what DD would expect given its better technology and higher margins, but it is still a public value that we are sure DD would rather not see in the market. On the positive side, a consolidated TiO2 market is a good thing for any future owner of DD’s business.
All three of these stocks have looked interesting to us for some time – since the fall in TiO2 margins. We have focused more on DD because the negative revisions at ROC and HUN have been high. Based on valuation, we see upside in all three names.