Huntsman Corp. (HUN) agreed to buy Rockwood Holdings Inc. (ROC)’s titanium-dioxide assets for $1.1 billion to create the world’s second-largest producer of the white pigment, with plans to sell shares in the new business.
Huntsman also will take on $225 million in pension obligations, the Salt Lake City-based company said today in a statement. The deal is expected to close in the first half of 2014, subject to regulatory approvals, followed within two years by an initial public offering of the combined titanium-dioxide unit and other acquired assets, Huntsman said.
Huntsman is creating a business with 16 percent of the market for titanium-dioxide, also known by its chemical formula TiO2 and used as a whitener in paint and toothpaste. Shedding TiO2 allows Rockwood to focus on its higher-value lithium business, while Huntsman moving TiO2 to an independently traded company shifts investor focus to better-performing businesses such as polyurethanes, used in insulation and foam cushions.
“Huntsman will trade more in line with polyurethane producers,” such as Dow Chemical Co. (DOW), BASF SE (BAS) and Bayer AG (BAYN), Hassan Ahmed, a New York-based analyst at Alembic Global Advisors who rates Huntsman the equivalent of a buy and doesn’t rate Rockwood, said by phone today. “Clearly the market likes it.”
Huntsman rose 1.9 percent to $19.50 at the close in New York. Rockwood increased 0.9 percent to $67.21.
The timing of the IPO depends partly on conditions in financial and TiO2 markets, Chief Executive Officer Peter Huntsman said on a conference call today. Huntsman plans to remain a majority owner of the pigment business “for some time” after the public offering, he said in a phone interview today.
The company beat out other bidders for the Rockwood assets, he said.
A shake-up of the TiO2 industry has been in the works since Rockwood in January announced plans to shed TiO2 by year end. DuPont Co., the largest producer, said in July it may sell or spin off its titanium unit. Tronox Ltd. (TROX), another U.S. competitor, said in February it was interested in acquiring TiO2 assets.
The sale concludes Rockwood’s transformation into a company focused on its fastest growing units, lithium and surface treatment, Chris Shaw, a New York-based analyst at Monness, Crespi & Hardt, said today in a note. The sale price is “better than expected” even though it is less than Rockwood originally sought, he said.
“The remaining two segments now are free to garner multiples that are higher than before,” Shaw said. Surface treatment should trade at 12 times Ebitda and surface treatment at 8.5 times earnings, he said.
TiO2 sales at Huntsman were $1.44 billion last year and $889 million at Princeton, New Jersey-based Rockwood. A global oversupply has caused prices to fall since mid-2012, eroding profitability.
“We anticipate TiO2 demand will continue to recover in the coming quarters,” Peter Huntsman said in the statement.
Earnings before interest, taxes, depreciation and amortization in the combined unit will be about $550 million by 2016, Huntsman said. That includes $200 million of Ebitda from both the Huntsman and Rockwood businesses and $130 million in synergies, adding 60 cents to Huntsman’s per-share earnings, the company said in a presentation. About $75 million of savings should occur by 2015, the company said.
Huntsman will borrow more than $1.1 billion to finance the transaction, Chief Financial Officer Kimo Esplin said. Incremental interest payments will be $45 million to $55 million, he said on a conference call.
Huntsman gains three TiO2 factories with about 330,000 metric tons of capacity in Germany and Finland, Esplin said. Europe will account for 51 percent of Huntsman’s pigment sales, up from 45 percent currently. Huntsman becomes the largest buyer of sulfate ores, providing a raw material cost advantage versus producers using chloride technology, the company said.
The acquisition also includes Rockwood’s performance additives unit, which makes synthetic iron-oxide, color additives, timber-treatment products and specialty automotive materials.
The acquired units had $1.5 billion of sales in the last 12 months, Huntsman said in the presentation. Earnings in a “normalized” year are split evenly between TiO2 and performance additives, Esplin said.
Huntsman said the cash price it’s paying is 5.5 times estimated 2014 earnings before interest, taxes, depreciation and amortization, excluding one-time items. The multiple is “bang in line” with the trading valuations for commodity chemical companies, so Huntsman isn’t paying an acquisition premium, Ahmed said.
DuPont, which is based in Wilmington, Delaware, has about 20 percent of global TiO2 capacity, Saudi Arabia’s Cristal has 15 percent, Huntsman and Kronos Worldwide Inc. each have 10 percent and Tronox has 9 percent, according to the presentation.
Huntsman said it has commitments to help it finance the takeover from JP Morgan, BofA Merill Lynch and Citibank. The company’s financial adviser on the deal is Bank of America Corp. and its legal adviser is Vinson & Elkins LLP. Rockwood said in a separate statement its financial adviser is Lazard Ltd. and its legal advisers are Hughes Hubbard & Reed LLP and Willkie Farr & Gallagher LLP.
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