Deal Chemistry in the Air for Revamped Clariant: Real M&A

This may be the year for some dealmaking chemistry between Clariant AG and potential buyers.

In his six years as the $5.7 billion company’s Chief Executive Officer, Hariolf Kottmann has used acquisitions and almost $1 billion in divestitures to lift the chemical producer’s profitability. With net income projected to rise next year to the highest since 2000, the new and improved Clariant may entice both private-equity buyers and other chemical makers, according to shareholder Alpine Woods Capital Investors LLC. Clariant’s Swiss headquarters could also make it a candidate for a tax-inversion transaction.

After the overhaul, “they’ve got a number of businesses that are in really good niches, so good growth, high margins, high return on capital and cash generative,” Brian Hennessey, a fund manager at Purchase, New York-based Alpine Woods, which oversees about $4.5 billion, including Clariant shares, said in a phone interview. “This is the Holy Grail” for a buyer.

BASF SE, the world’s largest chemical producer, may be interested in a takeover, said Kepler Cheuvreux. Evonik Industries AG, the $16 billion German chemical maker, could see benefits from a deal with Clariant, said Zuercher Kantonalbank. The company may command at least a 21 percent premium, according to Bank Vontobel AG. An acquisition would add to the busiest year for chemical dealmaking since 2008, with more than $55 billion in takeovers announced so far.

Kai Rolker, a spokesman for Clariant, declined to comment. Clariant shares rose as much as 2.9 percent to 16.95 francs, the biggest intraday jump in almost five months, before closing at 16.55 francs.

Targeting Growth

Deals are on the rise as companies seek to expand in specialty chemicals and add growth, said Jeffrey Stafford, a Chicago-based analyst at Morningstar Inc.

Eastman Chemical Co. agreed last month to buy Taminco Corp., a producer of alkylamines whose sales are projected to grow at a faster pace than its own. Albemarle Corp. brokered a deal in July for lithium producer Rockwood Holdings Inc., saying it expected demand for the lightweight metal used in smartphones and electric cars to surge.

Similar motivations could drive suitors to Clariant. Kottmann, a 30-year veteran of the chemical industry who took over as CEO in 2008, has overhauled the company to make it more profitable, with a focus on areas such as catalysts for the petrochemical industry, agrochemicals and ingredients for shampoos and moisturizers.

Nice Mix

Clariant’s revamp included the acquisition of German catalyst-maker Sued-Chemie AG in 2011 and the shedding of less-profitable units making commodity chemicals for paper, leather and textiles. Net income is set to jump to 404 million francs ($422 million) next year, compared with a loss the year Kottmann took over.

“Since they finished the restructuring, portfolio reshuffling and integration of Sued-Chemie, they’ve got a really nice mix of businesses,” Patrick Rafaisz, a Zurich-based analyst at Bank Vontobel, said by phone. “If any major deal would happen in Europe, Clariant is definitely one of the top picks for any global diversified chemical company.”

Buyers can still get Clariant for a relative bargain. The maker of pearlizing concentrates for shampoo trades at about 9 times its earnings before interest, taxes, depreciation and amortization in the last year. That’s a discount to the median multiple of 11 for similar-sized peers, according to data compiled by Bloomberg.

‘Hidden Gem’

Rafaisz said a sale price of at least 20 Swiss francs a share would be fair, or 21 percent more than its closing price yesterday. Bernd Pomrehn, an analyst at MainFirst Schweiz AG in Zurich, said management should accept an approach giving shareholders a premium of 20 to 25 percent.

Clariant could appeal to private-equity investors, who may be tempted by the chance to snap up a “hidden gem” with potential for significant cash generation, Hennessey of Alpine Woods said. Chemical producers may be interested in Clariant’s focus on higher-margin businesses, and the company’s market value of less than $6 billion would make it easily digestible for a larger diversified competitor, he said.

A combination between Clariant and Evonik, a $16 billion German chemical company, would yield substantial synergies and present no significant antitrust issues, Martin Schreiber, a Zurich-based analyst at Zuercher Kantonalbank, wrote in an e-mail.

Prior Speculation

Schreiber pointed to Dow Chemical Co. as another potential buyer to consider, while Kepler Cheuvreux analysts in a report last week highlighted Clariant as an appealing target for Germany’s BASF, which was valued at $82 billion yesterday.

BASF and Dow have been speculated as buyers for Clariant before. In 2008, when Clariant was roiled by disappointing earnings, analysts saw the conglomerates as potential acquirers.

“Clariant still has quite a diversified portfolio, ranging from oil services to personal care, so it is difficult for me to see the perfect fit with any other player,” Pomrehn said by email.

Representatives for Evonik, BASF and Midland, Michigan-based Dow declined to comment.

There are other possible targets in the chemicals industry that buyers may pounce on first. Carlyle Group LP is open to bids for its Axalta Coating Systems as it simultaneously plans an initial offering for the business it bought from DuPont Co. in 2013, people familiar with the matter said last month, asking not to be identified because the plan is private.

Likely Targets

In a report this week, Laurence Alexander of Jefferies LLC highlighted Croda International Plc, a $4.4 billion maker of cosmetics ingredients, and $6.1 billion methanol producer Methanex Corp. as some of the most likely next targets.

Representatives for U.K.-based Croda and Vancouver-based Methanex didn’t respond to requests for comment.

While Clariant may not be the only target, it could be hard to overlook.

Clariant is a “company that overall is trading at a below-peer group, or below-market multiple, that has the majority of its earnings and cash flow with those better characteristics,” Hennessey of Alpine Woods said. “It seems like that’s what the acquirers are after.”

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