Ineos Finds PVC Salvation With Solvay in $5.6 Billion Merger

Solvay SA and Ineos Group Holdings agreed to merge their polyvinyl chloride assets in Europe into a 4.3 billion-euro ($5.6 billion) joint venture to ensure they survive depressed demand and competition from North America.

The merger will generate “significant” savings in areas from raw-material procurement to marketing, Solvay Chief Executive Officer Jean-Pierre Clamadieu said. Solvay plans to exit its 50 percent share in the venture by the end of the decade. Its shares jumped the most in more than nine months.

“To secure the future of the PVC assets, we had to participate in quite a bold move,” the CEO told journalists on a call.

The merger is a stop-gap solution for Solvay as it pulls out of commodity businesses and expands further into specialty chemicals following its $6.4 billion purchase of Rhodia SA of France in 2011. PVC makers in Europe have struggled to make a profit because of overcapacity and competition from North America, and exit options dwindled after a sale of similar assets by Arkema SA to Klesch Group soured.

Solvay rose as much as 7.9 percent to 121.05 euros, the biggest intraday gain since July 27, and was trading up 6.2 percent at 12:48 p.m. in Brussels.

Private Equity

For Ineos, it’s a chance to raise profitability at its debt-laden Kerling PVC business, with the addition of five upgraded factories that use the latest membrane technology to cut the environmental harm of the manufacturing process.

By working with Ineos, Solvay is avoiding the pitfalls of divesting the business to a private equity company.

Arkema SA is facing claims for 310 million euros in compensation from Klesch Group after the industrial investor disputed payments and information on the deal.

The Klesch and Arkema transaction had been seen as a landmark for Europe’s struggling PVC industry when it was agreed in late 2011, allowing Arkema to release an unprofitable business into the hands of an investor that saw cost-cutting and consolidation as a means to restoring profit.

Advent International Corp. has struggled to secure an exit from its Vinnolit business, as a slowdown in construction has harmed sales of PVC materials used in doors and windows.

Solvay was advised by Morgan Stanley on the deal.

Exit Secured

With no potential for a global PVC deal, Ineos presented the obvious fit for European assets, though the Rolle, Switzerland-based company’s approach to financing its Kerling PVC operation through debt contrasts with Solvay’s own approach, Clamadieu said.

The two companies have options to force a sale of Solvay’s remaining 50 percent stake to Ineos for a value equal to 5.5 times recurring earnings before interest, taxes, depreciation and amortization. The exit mechanism would have to be exercised between four and six years after the joint venture is formed, Brussels-based Solvay said in a statement.

The Ineos deal -- expected to close at year-end following approval by antitrust authorities in Europe -- will provide Solvay with an upfront payment of 250 million euros. That sum will be channeled into growth and acquisitions, Clamadieu said, adding that Solvay is currently working on a number of possible add-on projects with an enterprise value of as much as a few hundred million euros each.

Margin Improvement

Transferring PVC assets to the new entity will raise Solvay’s profit margin by 170 basis points and balance earnings more evenly between Asia, Europe and the Americas, Clamadieu said. A parallel sale process for a Latin American PVC business known as Indupa is moving ahead and an announcement may come in the next few months, the CEO said.

Based on 2012 figures, the combined business generated recurring Ebitda of 257 million euros and sales of 4.3 billion euros with 5,650 employees in nine countries. RusVinyl, Solvay’s Russian joint venture in chlorvinyls with OAO Sibur Holding, is excluded from the transaction.

The PVC venture’s outlook for profit may improve amid a plan by Ineos to import feedstock from the U.S.

The two parties have teams ready to deal with antitrust questions, and are prepared for “various scenarios” to meet competition regulations, Clamadieu said. No plant shutdowns are part of the project, he said. Solvay is also in talks with BASF SE, which owns a stake in part of one business that will be merged with Ineos.

“We’re committed to making this happen and have a high level of confidence” that the deal will go through, Clamadieu said. “This is a well-planned exit. The upfront payment shows we have been able to negotiate.”

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