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Huntsman to buy Rockwood’s pigments, additives businesses

2:47 PM MDT | October 17, 2013 | Vincent Valk

Huntsman: Pigments IPO within two years.

Huntsman has reached a deal to acquire Rockwood’s titanium dioxide (TiO2) pigments business, as well as certain other businesses, for $1.33 billion, including assumed pension liabilities. The other assets include color pigments and services, timber treatment chemicals, rubber and thermoplastics compounding, and water treatment chemicals. The deal is expected to close during the first half of 2014 pending regulatory approvals in Europe and the United States.

Huntsman intends to consolidate the TiO2 and pigments businesses with its own businesses in the same areas. This move would create the second-largest global TiO2 producer, after DuPont, with 16% of global capacity. Huntsman intends to spin off the consolidated pigments business in an initial public offering within two years of the deal’s close. About 51% of revenues for the combined business will be in Europe, according to Huntsman. Total TiO2 capacity of the combined business will be 905,000 m.t./year, Huntsman says.

“This acquisition provides a unique opportunity to unlock value within our pigments business and builds on the strong improvements we have made to its competitiveness. With this combination, we will be better positioned to serve customers through a broader product range including color pigments, functional additives and specialty TiO2 pigments. We will become the second-largest global producer of TiO2 and inorganic color pigments,” says Huntsman president and CEO Peter Huntsman.

The acquired businesses recorded $1.45 billion in sales during 2012, according to Rockwood. The TiO2 business, the largest of the group, accounted for two-thirds of that total, with color pigments accounting for an additional 22%. The purchase price represents 5.5 times the business’s estimated 2014 Ebitda, $200 million. The group has about 3,300 employees worldwide.

Huntsman expects the deal to be immediately accretive for earnings and to generate $130 million in annual cost savings by the end of 2015. Earnings accretion is expected to total 60 cts/share in 2014, Huntsman says. The company also expects TiO2 demand to continue to recover during that time. Huntsman has received financing for the deal from J.P.Morgan, Bank of America Merrill Lynch (Charlotte, NC), and Citibank and expects annual interest costs of around $50 million associated with this debt.

For Rockwood, the deal marks the completion of a string of divestitures that include its ceramics business and its clay-based additives business. The company has used proceeds from those deals to pay down debt and buy back shares.

“With the completion of these initiatives, Rockwood has reached a significant milestone in its eight-year history since its IPO in August 2005 and is now uniquely positioned to grow within the specialty chemical sector. We remain committed to a disciplined approach in implementing our long-term business strategy, which is to further enhance shareholder value by creating a premier global specialty chemical company with market leading positions in all of its businesses,” says Rockwood chairman and CEO Seifi Ghasemi. The deal leaves Rockwood primarily focused on lithium and surface treatment products for metals.

Laurence Alexander, an analyst with Jefferies (New York) calls the transaction “classic Huntsman: a fixer-upper of a quasicommodity with tolerance for higher leverage near term in exchange for value creation over two to three years. The key risks, in our view, are whether Huntsman can fully achieve targeted synergies and whether the TiO2 industry continues to normalize.”

The deal could have ramifications for other TiO2 mergers and acquisitions, about which a number of rumors have swirled. “We believe the market was speculating on a potential acquisition of Huntsman’s TiO2 assets by Tronox, which, based on our estimates, would have been highly earnings accretive for Tronox and valuation accretive for Huntsman,” says Hassan Ahmed, an analyst with Alembic Global Advisors (New York). “The removal of this scenario, on the margin, would be a negative for Tronox. That said, we believe the perceived negative impact of such a deal not transpiring would be offset by reiteration by Huntsman management of continued positive TiO2 fundamentals as well as the possibility of a return of capital raised by Tronox to carry out such a deal.”

Additionally, DuPont, the world’s largest TiO2 producer, is exploring a sale of its $7.2-billion performance chemicals business, slightly less than half of which is in TiO2. Financial sources say a spin-off of the business in an IPO is also possible. Rockwood had been in negotiations with private equity firms to sell TiO2 and performance additives earlier this year, but its $2-billion asking price was too high for potential acquirers, reports from that time say.

Lazard (New York) was Rockwood’s financial advisor on the deal, while Hughes, Hubbard & Reed (New York) and Willkie Farr & Gallagher (New York) acted as the company’s legal advisors. Huntsman’s financial advisor was Bank of America Merrill Lynch, and Vinson & Elkins (Houston) was the company’s legal advisor.

The TiO2 industry has been on a roller-coaster ride in recent years, with high prices in 2010 and 2011 collapsing in 2012 and 2013, highlighting the sector’s cyclicality. Operating rates have recovered in recent months and are currently somewhat short of 90%, though they remain well short of peak levels, according to Huntsman. Demand has recovered somewhat from last year’s trough. Huntsman expects demand recovery to continue, the company says. However, Wells Fargo analyst Frank Mitsch finds that “the structural issues in TiO2 will remain challenging. Given overcapaicty, we see limited room for pricing gains in the near term.”

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