Conglomerates Breaking Themselves Up
The move to pure plays and pushing for sustainability
Welcome to the Financial issue of The Polymerist. This is where I try to cover all of the financial transactions shaping the industry. The chemical technology of the industry is really only a third of the equation because without the right financing there is no scale up.
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The chemical industry is in flux right now and conglomerates that used to operate in different end global markets are breaking up to focus on pure plays. This is not just happening in the chemical industry, but across all industries right now. Toshiba is breaking up. GE has been shedding it’s profitable non-core business units for what seems like 10+ years now, but they announced they have finally decided to split into three companies. Planet Money’s Greg Rosalsky reported:
"There is absolutely no business justification for conglomerates, because investors can achieve — on their own — everything that the conglomerate achieves," Lev says. This was especially the case after the rise of mutual, exchange-traded, and index funds, which allow investors to diversify risk and buy shares of a diverse array of companies very cheaply.
If we think about chemical conglomerates this has historically been companies like Dow, DuPont, Bayer, and BASF. Dow and DuPont merged and then split off different respective businesses. Bayer spun off Covestro, then Covestro spun off Lanxness, and Bayer bought Monsanto. BASF in my mind is the last true big chemical conglomerate and it was still the largest chemical company in the world when DowDuPont was a single entity. When it comes to chemicals it appears that investors would like to fine tune their portfolios down to the end markets or chemistry type.
Eastman, the former chemicals business of the conglomerate Eastman Kodak, has sold off their adhesives resins business unit. The tackifier resins unit is going to Synthomer for ~$1 billion dollars and encompasses resins used in tire manufacturing and adhesives. Synthomer primarily plays in aqueous acrylic dispersions, but I see this move as them looking to become a one stop shop for adhesives formulators.
Hexion had sold their aqueous resins business to Synthomer back in 2015/16, then they spun their specialty phenolics division to private equity, and now the new company Bakelite Synthetics is acquiring Georgia Pacific’s chemicals division. This appears to be primarily a private equity deal with Black Diamond working things behind the scenes. The acquisition will give Bakelite Synthetics a significant manufacturing grid in the US and access to new markets. This move should also equalize their business across the Americas and Europe from a revenue generation standpoint. I think this will make Bakelite Synthetics very competitive.
On the Hexion news front, they have entered into an agreement to sell the epoxy resin business to Westlake Chemical for about $1.2 billion. The revenue of the epoxy business in 2020 was about $1.5 billion and employs about 1300 people. Westlake is known for their polyolefins and vinyl (PVC) businesses. The entry into the epoxy market signals that epoxy resins are really just commodities at this point and it’s the formulators that make them special. If there was a chemical conglomerate that signaled the end of an era it was Hexion, which I wrote about last month.
DuPont, the chemical conglomerate built on the success of nylon, has decided to sell their nylon business unit, otherwise known as Mobility and Materials. This is truly the end of an era. It all comes down to profitability though as capturing high margin business. Stephen Moore for Plastic News captured it elegantly:
DuPont’s Mobility & Materials business returned a solid operating EBIDTA margin of 21.6% in Q3 of 2021, which would be the envy of many a polymers producer, but this compares with 25.3% for Water & Protection (which includes aramid fibers) and 32.4% for Electronics & Industrial, which will become a $40-billion business after the Rogers acquisition.
The Rogers Corporation acquisition for DuPont is valued at $5.2 billion dollars and it is 100% focused on electronic materials. In divesting the materials and mobility division it appears that DuPont would then only have 2 business units left and if they truly wanted to go pure play they would likely divest their water protection business and focus all out on electronic materials.
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I’ve heard rumors floating about that DuPont is also considering divesting their Tyveck business, which is used to make personal protective equipment and construction products. The business has a lot of competition I think in the non-wovens space and the Water and Protection EBITDA is probably being pulled up by the aramid (kevlar) business. If DuPont does divest their Tyveck business I see it going to at least 2 different companies, one for construction products, and the other for PPE and packaging.
When it comes to investment, Shell is putting up the money to upgrade operations in Singapore’s Puala Bukom island to transform plastic pyrolysis oil to chemicals. The unit is supposedly able to handle 50,000 tons per year of pyrolysis oil. It’s unclear as to which type of pyrolysis oil will be used or the yields of the actual pyrolysis process, but I suspect that Shell’s deal with Pryme that I wrote about last month is playing a role here and Shell’s goal to use more plastic waste in their supply chain.