Huntsman Sells
Their textiles division for $718 million to SK Capital
It’s been a bit since I’ve covered any M&A here on the newsletter, but I see this as a follow-up on some prior writing I did about Huntsman. Back in January, Huntsman was going through some activist investor turbulence with Starboard and there were some board seats up for grabs. In March, Starboard didn’t win the seats they had hoped to gain, but I think their message was sent to Huntsman management. Get more profitable. Now.
If Huntsman had been investing for the long term in R&D and growth this strategy they might have been in a good position to capitalize on new products, even if those products were more efficient versions of their old products. I think right now Huntsman is trying to weather the storm of weaker demand in Asia, slowing demand here in North America (or at least what they call slowing demand), and waiting for Europe to get sorted (i.e. When Russia is defeated by Ukraine). The 17% EBITDA reported in Q2 has done little to their stock, which is mainly just flat HUN 0.00%↑. Their overall business strategy appears to mainly be passing through costs:
We passed through approximately $900 million of annualized increases in raw materials and energy costs, which approximately half were related to higher energy prices. Overall volumes declined 4% as we continued to pursue our value-based strategy.
And again they talk about pricing:
Huntsman Building Solutions platform recorded second quarter revenues of approximately $154 million, up 16% year-over-year, driven by pricing.
They are making the value over volume argument as well, but this is tough when their business is sort of split between specialties and commodities. Further, Huntsman is dealing with supply chain issues around certain key raw materials such as blowing agents (critical for making polyurethane foam) and the overall tone I got from the earnings transcript was, “we are gonna hang in there till things get better.” The stock price is down significantly since March when they defeated Starboard’s attempt. Maybe Starboard was right?
One thing that I wrote about back in January was that Huntsman was likely to sell their textiles effects business:
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.
Well, guess what. They have sold their textiles effects business to SK Capital (private equity) for about $718 million. SK Capital is going to merge this business with their existing business in the space Archroma. It should also be noted that the Textiles Effects business had a rough quarter with double digit decreases in volume and a 7% reduction in sales. I bet SK Capital got a discount after Huntsman was shopping this deal around for 7 months.
Voila. We have market consolidation and Huntsman becomes more of a commodities business, but one that is more focused on industrial end markets as opposed to consumer apparel.
I think Huntsman needs to do some more contemplation. Who are they really? Are they a specialty chemical company or are they a commodities company? Do they want actual product development or is it all about tech service and low costs?
I suspect there is a split in the future for the company. I think the advanced materials and polyurethanes division with whatever automotive business they have makes sense to stay together. If I was an investor I’d see this as the growth part of the company, especially with automotive undergoing a tectonic shift to electric. There are all sorts of ways high value synthetic polymers can play a role from composites to adhesives to coatings. I think that perhaps cost cutting in the Polyurethanes business may be getting them ready to get ready to have this business be independent or being shown around to investors. Per the earnings call via Peter Huntsman:
On an annualized basis, we delivered more than $40 million from our first phase of cost optimization synergies in polyurethanes. As we stated last quarter, we are targeting an additional $60 million by the end of 2023. These cost savings will be achieved through optimization of our footprint, for example, by exiting regions in markets where we -- where the returns do not justify long-term supply such as Brazil and other regions with similar dynamics and continuing to lower back-office expenses. We expect the lion's share of these savings to impact 2023.
The commodities side of the business might be worth just keeping around as a cash cow for the Huntsman family and to have the whole thing go private. It’s hard to know with commodity chemicals, but the business moves in waves. How old are the plants and how much real maintenance do they need? Are these plants still strategically located to minimize shipping costs? Are they staffed correctly?
I think Huntsman is treading water and they are getting tired and Starboard is still out there. Prices might be sky high now, but I suspect many of Huntsman’s customers are on index pricing. For the next few quarters we are going to be reading or hearing a lot of, “natural gas is expensive because of Europe and we cannot lower prices.” Or something to that effect and it will be interesting to see the effect on the indexes. One thing to look out for is if Huntsman loses volume compared to competitors in their polyurethane business. Top line revenue and EBITDA are good storytelling tools but volume of product moved out of the plants never lies.