27 September 1999 00:00 [Source: ICB Americas]Despite the collapse of Millennium Chemicals' share price over the past month, analysts remain confident that TiO2 is a differentiated and solid business and that an Equistar Chemicals LP disposal is in the near-term cards for the company. Although analysts are trimming their third quarter estimates for Millennium's stock, they say the company offers value and is worthy of purchase.
"The sell-off in Millennium shares is derived from two key misperceptions on the part of Wall Street," notes Frank J. Mitsch, an analyst for Deutsche Bank Securities. First, Mr. Mitsch says it is incorrect that Millennium will be unable to monetize Equistar in the near term. TiO2 is also falsely considered "an accident ready to happen."
Although 80 percent of Millennium's critics do not think the company will announce a sale of its stake in Equistar before the end of the year, according to Mr. Mitsch, he is "willing to believe that they will." As for TiO2, he regards the business as "a functioning oligopoly with very rational behavior on the part of suppliers."
The TiO2 market continues to improve, even with regard to near-term trends. "We expect to see year-over-year volumes up in the third quarter of 1999, although they should drop about 2 percent sequentially, given the typical seasonal slowdown," says Mr. Mitsch. He adds that pricing will be flat relative to the second quarter, but prices should rise in the fourth quarter.
In addition, Mr. Mitsch expects higher profits from Millennium's TiO2 business as the company closes the gap in production costs with industry leader DuPont. Strategies to improve profits include globalizing the industry through SAP, upgrading the quality of plant management, purchasing companies in France and Brazil, expanding their product lines and reducing staff by about 15 percent.
Donald D. Carson, an analyst at J.P. Morgan Securities Inc., notes that TiO2 results are tracking his low expectations "although production problems and cost overruns, which have sapped results this year, appear to be abating." Millennium's recently expanded, but troubled, plant in Stallingborough, UK, is running at 88 percent in September versus 70 percent in the second quarter, Mr. Carson adds.
"On the negative side, Millennium's average worldwide realized prices are off about 1 percent sequentially, with volumes off about 2 percent," he notes.
With regard to Equistar, Mr. Carson says it is apparent that neither Lyondell nor Occidental, Millennium's partners in the joint venture, are likely to increase their stake in the venture in the near-term, and no third party has emerged as a potential buyer.
"We believe that Millennium will likely be successful in monetizing its Equistar stake by mid-2000, and [we] note that even at a price substantially below its $1.2 billion book value, Millennium could use the proceeds to repurchase a significant portion of its market cap," says Mr. Carson.
"Although Occidental and Lyondell are the logical buyers, they are certainly not the only buyers, and we would not be surprised if Millennium is in discussions with a variety of potential companies (e.g., foreign, non-public, etc.)," says Mr. Mitsch.
"We believe that Millennium will use most, if not all, of the proceeds of the Equistar sale to buy back additional shares. We also note that they would save taxes by selling both their Equistar and acetyls business to the same buyer, which would be nice but not imperative."
Nevertheless, Mr. Mitsch is reducing his third quarter EPS estimates due, in large part, to higher feedstock costs at the soon-to-be-sold Equistar that are hurting other petrochemical producers as well.
Millennium could go private if it can sell off its 29.5 percent stake in Equistar, which it hopes to accomplish by the end of 1999 or early 2000. Following such a deal, Millennium would likely launch a large stock repurchase using 80 percent of the Equistar proceeds to get the stock price up to the low 30s. If the stock remains depressed, a buyout led by management could take place.
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