Activist Wants To Change Huntsman

Starboard Value Wants Improvements

Welcome to the financial issue of The Polymerist where I write about some of the more financially focused news that is going on in the chemical industry.

This is the last issue of The Polymerist sponsored by:

If you didn’t know already, activist investor Starboard Value is pressuring the board at Huntsman to appoint their nominees to the board of directors. Starboard Value would wants 4 board seats and views Huntsman as a company that could do much better than they are now. Starboard Value just need to convince the rest of the shareholders that they are right.

Huntsman is a vertically integrated polyurethane and epoxy system house that has been struggling to keep pace with the rest of the chemical industry with respect to profitability. Starboard Value is an activist investor well known within the chemical industry as an investor that seeks to increase value to shareholders by changing corporate leadership. Starboard Value wrote a letter to Peter Huntsman detailing why they want change of leadership:

the Company’s years of missed execution and unfulfilled promises have translated into poor stock price performance, leaving long-term shareholders significantly worse off than if they had simply invested in the chemical or broader market indices – this is especially true for the Company’s most loyal shareholders who participated in the Huntsman initial public offering and have underperformed both the chemical and S&P 500 indices by 330% and 337%, respectively

Starboard Value presented their case for why they think Huntsman is ready for change in October to their own shareholders via this presentation (slides 3-19). This slide in particular stood out to me showing Huntsman’s EBITA margin against their peers.

Starboard is not alone in thinking that Huntsman is ripe for a fresh start. Analysts at Deutsche Bank and UBS agree with say similar things in their analysis and consider Huntsman’s peers to be Celanese and Eastman. Huntsman is trailing them slightly in profitability. I disagree with assessment of Huntsman’s peers who I think are more aligned with someone like Covestro or Hexion’s old Epoxy/Versatics business, which was recently split up.

What Does Huntsman Really Do?

At its core Huntsman makes and sells isocyanates either in the form of methylene diphenyl isocyanate (MDI) or it’s polymeric version (pMDI). Huntsman also makes and sells epoxy resins based on bisphenol A otherwise known as the diglycidyl ether of bisphenol A (DGEBA). These three chemicals and variations on their grades are all commodities. Huntsman further has the ability to make amines which are both the precursor to making isocyanates (by reacting with phosgene) and the cross-linkers for epoxy resins (diamines).

Huntsman turns commodity chemicals into specialties by formulating reactive polymeric systems. They ability to make diamines and other crosslinkers such as polyols gives them a unique ability to be a one stop shop for users of these reactive polymeric systems. If you think about a prepackaged 5 minute epoxy resin from the hardware store Huntsman makes both components. If you think about a spray foam insulation provider Huntsman sells spray foam formulations to contractors that would install it in your house. You can buy the base chemicals from Huntsman too, but doing your own formulation can be costly.

Cross-linkers or curing agents for polyurethanes are more complex than epoxies and encompass a few different classes of product. Huntsman can also do alkoxylations with ethylene oxide (EO) and propylene oxide (PO) and they are vertically integrated within this value chain too by making other end products such as ethylene carbonate and propylene carbonate or other downstream derivatives of EO and PO.

Huntsman is also into textile effect chemicals such as water repellent coatings for your rain jacket, dyes, and printing inks. This is a profitable business, but managing that product portfolio looks to be really difficult. This is a true specialty chemicals business and I’m not sure Huntsman has the ability to really give it the attention it deserves because it is not core to the vertical integration that Huntsman has now with polyurethanes and epoxy resin formulations. I think of this profitable specialty business as having competitors such as Cabot, Evonik, or Celanese.

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Pure Plays All The Way

My position on how the current chemicals industry will move forward is reorganization into pure plays. I believe that Huntsman is trying to make itself into a solutions provider (solutions = specialty chemicals) by owning the formulations of their polyurethane and epoxy resin systems either for coatings, composites, adhesive, or sealants. Epoxy resins and polyurethanes are formulations of commodity chemicals for specific applications and the value right now is in the formulation for specific end markets.

Huntsman already sold their pigments and additives business, Venator Materials, to SK Capital Partners and they are reportedly looking to sell their textile effects business as well. If Huntsman chooses to divest this business I would see them as a pure play materials company and as a pure play they might be able to focus their product execution plan. I suspect that this is what Starboard Value really wants.

With the additional cash from these divestments Huntsman could go out and acquire a competitor or add a new business vertical built off of their core business. Huntsman’s acquisition of Demilec in 2017 provides a construction solutions outlet, but could there be an electronics materials maker or a composites maker such as Hexcel that Huntsman could acquire? The Ashland adhesives business would have made a lot of sense too, but that went to Arkema. 

If I was an investor in Huntsman I would want them to do the following: 

1. Fill up their existing plant capacity and then look to bottom slicing their low margin businesses. 

2. Once the plants are near capacity I would want the product development teams to create category redefining high margin products that no one else can make.

3. Create radical cost deflation on their supply chains and raw material feedstocks so the company can either capture more margin or secure volume by undercutting competition at a higher margin.

In looking at their most recent quarterly reporting Huntsman invested about 1.8% of their revenue into R&D for the first 9 months of 2021. In contrast Eastman invested about 2.4% of their revenue into R&D for the same time period. Based on their revenues this is a disparity of 0.6%. Not a fair comparison I know. If Huntsman was similar to Eastman (they are not) they would be spending about $34 million more for R&D in the first three quarters of 2021 and when you extrapolate these differences over decades this adds up to hundreds of millions of dollars not going towards new product development.

The other thing to consider is that much of the value in Huntsman’s business is generated by formulation of commodity chemicals for their customers and this requires R&D spending. Without the right investments into R&D and application testing it shouldn’t be a surprise that Huntsman is behind companies like Eastman and it’s another reason why Eastman is a bad peer to compare them to. Eastman is investing over a billion dollars into circular materials.

What Will Starboard Value Do?

My guess is as good as yours, but I suspect Starboard Value wants to cut the Sales and General Administration (SG&A) costs, try to improve operational efficiency, and speed up product development timelines. They will definitely sell the textile effects business too. These are the sorts of “operational executions” that I think Starboard is writing about in their letter and this is achievable given the right leadership team, incentive structure, and enough time.

I suspect a lot of shareholders want out, but they are probably HODLing. Huntsman has previously tried to get itself acquired. Back in 2008 they almost got bought by Hexion (really it was Apollo), but ended up getting paid a billion dollars instead once Apollo pulled out of the deal at the last minute. Huntsman tried again in 2017 when they wanted to merge with Clariant, but the deal was scrapped due to activist investor pressure within Clariant by 40 North (investment arm of Standard Industries). These two failed merger attempts makes me think that maybe even the Huntsman family wants out.

Tony