The $20 billion chemical merger involving Switzerland's Clariant AG and Huntsman Corp. is off. Having built a more than 20 percent stake in Clariant, activist group White Tale Holdings (a partnership between Corvex Management LP and 40 North) had sufficient heft to get what it wanted: The abandonment of a merger it argued had no strategic merit and undervalued Clariant's shares.
Clariant's management is in a tight spot, but there's pressure too on White Tale to show it has a better plan.
It's no real tragedy this deal isn't going ahead. Clariant failed to demonstrate why a merger of equals with Huntsman was best for its shareholders. The Swiss company's specialty chemical focus would have been diluted by some of Huntsman's commodity-focused assets. While the $400 million in deal synergies implied about $3 billion dollars of value creation, this would have been split with Huntsman's owners.
Arguably, Clariant's shareholders had more to gain if they'd simply been offered a straight takeover premium. The governance of the U.S.-Swiss company would have been complicated.
Fortunately, Clariant doesn't have to pay a break fee. So, besides the considerable amount of management time wasted, there's no real harm done. Indeed, the fact that Clariant's shares fell only 6 percent in early trading suggests this is only the start of its spell in the M&A spotlight.
The company has several options, including finding another merger partner, putting itself up for sale or selling assets. Appointing new bankers to consider these alternatives, as White Tale has demanded, would be a sensible first step.
Though Clariant is clearly in play, smoking out another bidder might not be easy. It has been tipped as a target for years: Evonik Industries AG was the perennial favorite. Yet no offer came and Clariant shares are now considerably more expensive. BASF SE has the firepower but it recently inked a $7 billion deal to acquire some seed assets from Bayer AG.
A more straight-forward idea would be for Clariant to sell its lower-margin plastics and coatings business (43 percent of annual sales). Management don't seem averse to parting with it but wanted to use any proceeds to mount a takeover. A sale now, though, would increase the chances of the rest of Clariant being acquired -- good for White Tale's chances of realizing a return but not necessarily for Clariant's customers or staff.
This is clearly a defeat for Clariant CEO Hariolf Kottmann, but one can sympathize. He runs a respected and profitable company and nobody wants to be the guy that breaks up a good business. The industry is consolidating, so there was merit in trying to bulk up. It's also much easier to be an activist investor throwing stones, than to structure a deal amenable to all stakeholders, including employees and various family owners.
Kottmann says it is "nonsense" to claim the company hasn't considered alternatives to Huntsman and he worries that activist investors aren't healthy for the Swiss economy. But Kottmann is well-rewarded: His pay and bonuses totaled 5.9 million Swiss Francs last year. If he's to keep the activists at bay, he needs to show they're not the only ones with ideas.
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