Financial Chemistry: Divestments, Acquisitions, Joint Ventures, Layoffs, Going Public, and Startups Raising Millions 🚀

The finance of chemistry

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Divestments

Reuters Staff reported that Exxaro, a South African mining company is divesting its shares in Tronox, a US based titanium products company. If you are asking yourself why is this guy writing about titanium it’s because titanium dioxide is one of the most widely used pigments in the world. Most coatings professionals have dispersed titanium dioxide at some point and there are whole subsets of coatings additives designed specifically to help disperse pigments. Reuters reported that Exxaro will use the money to pay off debt, fund capital commitments, and return money to shareholders.

To me Exxaro sounds like the shareholders are forcing the company to become a pure play in coal mining and want to pull as much money out of the company as possible while coal is still needed. Tronox meanwhile appears to be doing quite well with their 4Q 2020 and 2020 year end earnings report with an EBITDA margin of 24% and a YoY increase on revenue of 13% during a pandemic where almost everyone else reported losses. I didn’t realize that selling titanium dioxide and related minerals would be so profitable. Wondering who is competing with Tronox in the US? Chemours and Venator are also big sellers of titanium dioxide.

The reason why titanium dioxide is so useful is that it can have a small particle size and also has a very high refractive index. We can think of refractive index (RI) as a measure of how much light bends when it enters a material. Think about when you are in a pool and you stick your arm in the water and when you look down it appears that your arm is bent. That is an effect of light bending when it hits the water because water (RI = 1.3) has a different refractive index than air (RI = 1). Titanium dioxide has a refractive index of about 2.5-2.7 so it is a very efficient light scattering material and when used in paints it helps hide what is beneath. This is why you might be able to do 1-2 coats of paint in a house and completely hide the previous occupant’s love of pink.

Craig Bettenhausen reported for C&EN that Lonza is selling its specialties business for $4.7 billion to Bain Capital and Cinven. This move is to allow Lonza to focus on manufacturing Moderna’s mRNA Covid-19 vaccine. This is another move of shareholders wanting a “pure play” business. All indications of what I have read over the last few years indicates that healthcare and biologics should experience significant growth in the coming decades and companies devoted to “pure plays” will likely be able return significant capital to shareholders. Remember, GE Healthcare sold to Danaher for $20 billion.

This seems like a smart move by Lonza to raise capital that they can then deploy to build out additional manufacturing capacity. I do not think that the Covid-19 vaccine will be the last mRNA vaccine ever developed and Lonza will likely manufacture for Moderna’s next mRNA product as well. This would allow Moderna to just focus on bringing therapies to market and not have to worry about the manufacturing aspect. Lonza’s stock price has almost doubled since this time last year. One issue with pure plays is that when a shock to a specific sector happens the company may just go into bankruptcy.

Acquisitions 💸

When I was teaching organic chemistry labs at Rensselaer Polytechnic Institute I had a student tell me he wanted to go to medical school. I think I eventually wrote on one of his lab reports that he should consider doing research with me because he appeared to do quite well in the lab. I regret I was never able to get this student published with me in a journal, but he did get to play around in the lab a lot and eventually went to a really good graduate school.

I am proud to say that my former student Cory Sago just sold his first start-up company to Beam Therapeutics this week. Alison Gatlin for Investors Business Daily reported that:

Under terms of the deal, Beam paid $120 million up front in its own stock. Further, Guide shareholders will also be eligible to receive up to an additional $320 million in technology and product milestones. Those will also be paid in Beam stock.

Beam stock began trading in February 2020. The biotech company focuses on base editing, a recent advance in the field of genome editing. To make these medicines, Beam uses lipid nanoparticles. Lipid nanoparticles keep drugs intact until they get to a specific spot.

The latter is where Guide shines, according to Beam. Guide's platform can screen hundreds of nanoparticles simultaneously. This will help researchers identify lipid nanoparticles with novel distribution properties and select strong target cells.

"Using this platform, Guide Therapeutics has identified a broad library of lipids and lipid formulations that could accelerate novel delivery of gene-editing payloads to tissues beyond the liver," Beam said in a news release.

According to CrunchBase, Guide Therapeutics raised $13.9 million from investors and at the $120 million pay out that is about a 5-9x multiplier with the potential to be a much bigger return on capital depending on the initial funding deal if/when Guide hits their milestones. Not a bad return on investment for the initial investors in Guide, but this is in the form of stocks and thus not completely liquid. I am not sure if being acquired was Guide’s goal, but it’s better than running out of money and having to lay off all your employees.

I wish the best for Cory and the rest of the Guide Therapeutics team.

Joint Ventures

Agilyx and ExxonMobil announced that they have formed a joint venture called Cyclyx that will seek to do the following:

Cyclyx will aggregate and pre-process plastic waste to meet the technical requirements of a wide range of recycling processes while ensuring reliable supply of feedstock to its customers. Cyclyx aims to transform the current supply chain and help accelerate the growth of the advanced recycling industry by connecting companies looking for plastic waste solutions with customers engaged in recycling initiatives.

Agilyx will own 75% of the JV with ExxonMobil owning the remaining 25%. The press release did not indicate how much money ExxonMobil will be investing into the JV so it is hard to say how serious they are about how fast they want this company to grow. I see this more as ExxonMobil dipping their toe in the advanced recycling waters. They are still behind Neste and Total’s efforts over in Europe, but better to be late to a party than the last one through the door. Agilyx is a public company specializes in chemical recycling of plastic technologies and it trades on the Oslo exchange under AGLX. Agilyx has done numerous deals to license their technology to other chemical and oil companies.

Layoffs and Plant Closures

Vanessa Zainzinger reported for Chemistry World that BASF has closed their Seal Sands site, which produces hexamethylene diamine in northern England. BASF announced in 2019 that it was planning to cut 6000 jobs by the end of 2021 and then in September 2020 it announced that it was planning to cut an additional 2000 jobs by the end of 2022. This plant closure is somewhat of a surprise I think and seems to be driven in part by Brexit. Zainzinger does some good reporting here in that the plant was idled in January 2020 and BASF took a loan from the Bank of England:

BASF’s decision for Seal Sands, however, came with wider political repercussions because the industrial giant took a £1 billion loan from the Bank of England. The money was part of the UK’s covid corporate financing facility (CCFF) aimed at helping employers in the UK get through the crisis. CCFF, established in April, has so far lent more than £33bn to 232 companies.

It is unclear to me what the provisions of the money that BASF took, but if it was anything similar to the PPP plan here in the United States then employers who received government money only had to refrain from layoffs until the Fall of 2020. It’s unclear if BASF is in violation on the conditions of their loan, but I suspect that they are not and while I think the outrage is justified I do not see BASF getting into too much trouble here. Especially if they are keeping the vast majority of their sites operational in the UK.

The closure of the plant could have been spurred on due to Brexit. Stanley Reed for The New York Times reported that many chemical companies are looking to exit from the UK and move operations to the EU due to the additional headache of shipping chemicals into the EU and importing certain raw materials may become cost prohibitive for UK producers. Reed reports:

Adding to the burden, the British government is creating its own demanding set of chemical regulations, a mirror of the E.U. laws. An industry group said the cost to chemical businesses of recreating the European regulations, which requires extensive documentation, could reach as much as £1 billion, potentially a major burden on small firms and those with thin earnings margins.

The regulatory changes, plus the fact that chemicals can have long supply chains, have led some businesses to rethink their activities in Britain.

I find it amusing in a gallows humor aspect that these nationalistic policies end up creating more regulations and headaches for the businesses they supposedly support. I predict that things will get worse before they get better for chemical companies and their employees in the UK. I think the UK government should consider increased funding for small business loans to help generate new chemical start-ups to produce chemicals domestically or find ways to help transition this workforce into new sectors of employment. I predict more plant closures will occur this year and then in maybe 4-5 years demand will come back and there will be a shortage of necessary chemicals that will eventually have to be imported at higher costs. Perhaps a trade deal can be struck before all this happens?

Going Public 🚀 and Series A Funding

Alexander H. Tullo reported for C&EN that Origin Materials is going public via a special purpose acquisition company or SPAC. Origin’s main differentiation compared to other similar start-ups is that they have developed a route of using cellulosic biomass to produce chloromethyl furfural or CMF. Origin has stated that CMF can be transformed to para-xylene and thus transformed to terephthalic acid to make biobased polyethylene terephthalate or CMF can be transformed to furan dicarboxylic acid to make polyethylene furanoate.

Doris Guzman reported that Avantium also recently licensed some of Eastman’s FDCA intellectual property and that Origin licensed Eastman’s furan oxidation technology back in 2017. It will be interesting to see which polymers Origin produces first and I’m hoping to see them bring polyethylene furanoate before their PET technology. Origin may have to compete with Eastman’s own rPET process so the furan based polymers miht be their best course of action. I would happily pay more for a PEF bottle than a biobased PET bottle because I think it’s really cool, but then again I might be a bit biased when it comes to new biobased plastics.

Mike Butcher reported for TechCrunch that Everdrop has raised 21.8 million Series A funding round led by Felix Capital. The Munich based startup has a relatively simple product. You get some tablets that contain surfactants, add those tablets to water and once they dissolve you have your cleaning product. This product keeps water from being shipped long distances and also eliminates the need to package cleaning products in single use plastic bottles. Consumers who buy Everdrop’s cleaning products could use their own plastic spray bottles and possibly unlocks production of high performance reusable spray bottles made out of engineering polymers. Everdrop’s technology not only proposes a reduction in single use plastics it could also reduce the potential for microplastics that could be generated by similar products like Tide Pods. Everdrop has a similar dishwasher tablet, but the tablet has no packaging.

Everdrop will face stiff competition and it’s not completely clear what their differentiation is in what appears to be an already saturated market.

Talk to you later,

Tony


The views here are my own and do not represent those of my employer nor should they be considered investment advice.

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