Arkema Seen Luring Sabic Bid With Low EBITDA Multiple: Real M&A

Arkema SA Chief Executive Officer Thierry Le Henaff
Arkema SA Chief Executive Officer Thierry Le Henaff. Photographer: Fabrice Dimier/Bloomberg

Arkema SA, already cheaper than any of its rival industrial chemical producers, may now be a takeover target for Saudi Basic Industries Corp. and DuPont Co. after deciding to spin off its unprofitable vinyls business.

Since losing a third of its market capitalization in the past seven months, Arkema’s combined equity and net debt is valued at 3.5 times this year’s earnings before interest, taxes, depreciation and amortization, based on analysts’ estimates compiled by Bloomberg. The multiple is the lowest among rival chemical producers, including Lanxess AG, Solvay SA, Clariant AG and Dow Chemical Co., according to data compiled by Bloomberg.

With the sale of a unit that’s been hampered by slumping construction spending, Arkema may now attract takeover interest from Sabic, the world’s biggest petrochemicals maker, and DuPont, the largest U.S. chemicals producer by market value, according to Berenberg Bank. The company, which makes chemicals used in everything from athletic shoes to air conditioning, may also lure private equity bidders, said Nomura Holdings Inc. Colombes, France-based Arkema could fetch as much as 70 euros a share in an acquisition, according to Berenberg, a 47 percent premium to yesterday’s closing price.

“It revives the allure for a takeover,” Francoise Delva, an analyst at Gilbert Dupont in Paris, said in a telephone interview. The separation of the vinyls unit “is positive for the company, hence it will expose it to the appetite” of potential buyers, she said.

Remaining Independent

Arkema shares rose 9.1 percent to 51.98 euros today, the biggest gain in the Bloomberg Europe Chemicals Index.

Justin Powell-Tuck, a spokesman for Riyadh, Saudi Arabia-based Sabic, didn’t respond to an e-mail or calls to his office phone and mobile phone requesting comment. Dan Turner, a spokesman for Wilmington, Delaware-based DuPont, declined to comment on speculation regarding Arkema.

“Our objective is still to remain independent with rapid and deep transformation of the company,” Thierry Le Henaff, Arkema’s chief executive officer, said in an e-mailed response to questions. “Over the long term, we are convinced that the growth potential of the company remains very promising.”

Arkema disclosed on Nov. 23 that Klesch & Co., a Geneva-based investment company focused on aluminum and oil refining, will buy its vinyls unit. The division, which makes the basic materials for PVC, a plastic used in construction and food-packaging, has posted an operating loss the past three years because of the slumping European construction market and rising energy prices. Arkema said the sale will close by mid-2012.

‘Massively Undervalued’

“The vinyls business has been a drag because of the end market, which is construction,” Jaideep Pandya, a London-based analyst at Berenberg, said in a phone interview. “Now that the vinyls are gone, the asset becomes very interesting. The stock is still massively undervalued.”

After reaching a peak of 78 euros in May, Arkema shares declined 49 percent through Nov. 22, the day before the vinyls spinoff was announced. Since then, the stock rebounded 20 percent, giving the company a market value of 2.95 billion euros ($3.83 billion) as of yesterday, data compiled by Bloomberg show.

Arkema’s equity and 654 million euros in net debt were valued yesterday at 3.5 times this year’s Ebitda, which analysts project will climb to a record 1.03 billion euros, according to estimates compiled by Bloomberg. That’s the lowest multiple among its chemical competitors, which Arkema identifies as Lanxess, Solvay, Clariant, Akzo Nobel NV, Tessenderlo Chemie NV, BASF SE, Celanese Corp., Dow and DuPont. The group was valued at a median of 5.3 times 2011 Ebitda as of yesterday, the data show.

‘Low Multiples’

Arkema’s shares also closed at a 57 percent discount to its sales, the data show.

“With its current low multiples, a company that’s divested the least interesting part for a buyer will certainly rejoin the group of potential targets,” Patrick Lambert, an analyst at Societe Generale SA in Paris, said in a phone interview.

The company may draw buyers because of its “strong” market position in acrylics, technical polymers and niche products such as fluorochemicals and thiochemicals, he said.

Arkema CEO Le Henaff has said he will continue to invest in its remaining plants and businesses that make ingredients used in paints and adhesives, diapers, water treatment, oil and gas recovery, animal nutrition, solar panels, lithium-ion batteries and lightweight car engine parts.

Sabic, DuPont

The diversified portfolio may attract DuPont because of the “significant overlap” in methacrylates and PVDF fluorinated polymers used in water treatment and solar panels, said Pandya at Berenberg. The almost $40 billion company could boost its profit margin by buying Arkema and cutting costs, he said.

Saudi Basic, known as Sabic, could upgrade its plastics portfolio with Arkema’s PVDF and high-end polymers, Pandya said. The state-controlled company, with a market value of about $76 billion and almost $15 billion in cash as of Sept. 30, could also use Arkema to help tap into the “megatrend” of solar power in the Middle East, he said.

An acquisition of Arkema may fetch 65 euros to 70 euros a share from a strategic buyer, according to Pandya, valuing the company’s equity at as much as 4.33 billion euros. It would also represent a premium of up to 47 percent more than the company’s closing stock price of 47.65 euros yesterday.

While Jean De Watteville, a London-based analyst at Nomura, pegs Arkema’s value at closer to 90 euros a share based on a discounted cash flow model, he said strategic buyers aren’t likely to emerge because Arkema’s broad range of products makes it more difficult to boost revenue and trim costs in an acquisition.

Leveraged Buyout

When market turmoil from Europe’s sovereign debt crisis eases and debt financing for buyout firms becomes more readily available, Arkema may instead lure a private equity buyer, De Watteville said.

“The sale of the vinyls business is the most dramatic improvement of the portfolio,” he said in a phone interview. “The new portfolio provides much better prospects for cash flow generation. Before, Arkema didn’t use to have the cash-flow profile allowing for a leveraged deal.”

Since Arkema’s separation from Total SA in May 2006, Le Henaff has sold less profitable units from agrochemicals to formaldehyde resins and now vinyls. Through yesterday, Arkema had gained 73 percent since the split from Total when the shares were listed at 27.5 euros, while France’s benchmark CAC 40 Index lost 40 percent.

‘Cherry’ on Cake

“The spinoff did make it a more attractive company,” Dominik Frauendienst, a London-based analyst for Citigroup Inc., said in a phone interview, referring to the sale of the vinyls business. “Does it make them now a takeover candidate? We think this is unlikely, but balance sheets are healthy and companies are looking for M&A opportunities and therefore a takeover cannot be ruled out.”

Three months ago, Solvay, the world’s largest soda-ash maker, completed the 3.4 billion euro purchase of specialty-chemicals maker Rhodia SA at a 57 percent premium to the company’s 20-day trading average. The combination of Arkema’s rivals contributed to $30 billion in chemical industry takeovers this year, on pace for the highest since 2008, the data show.

There may now be “relatively strong synergies” between Arkema and some of its competitors, said Arnaud Cayla, head of investment at Paris-based GT Finance, which owns Arkema shares.

“The valuation is very attractive,” Cayla said in a phone interview. “If -- cherry on the cake -- one of the giants of the market were to be interested in Arkema, that would be a plus.”

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