INSIGHT: Basell is paying for integration and growth

17 July 2007 16:58  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--The 20% premium on Lyondell’s closing price on Monday that Basell is prepared to pay to acquire the third largest chemical company in the US at first glance may look excessive, but it is not.

The cool $19bn, including debt, gives Basell important American upstream integration and new polyethylene production capacity. It lifts it to the global number one spot not just in polypropylene (PP) but also in high density and low density polyethylene (HDPE and LDPE).

Both Basell and Lyondell face the prospect of an olefins and polyolefins downturn in 2009/2010. A combined group is likely to have greater strength in depth.

Analysts on Tuesday noted the positive integration aspects of the deal, particularly in the propylene/polypropylene (PP) chain. It also gives Basell attractive options in other important petrochemical chains.

The combined group will have sales approaching $41bn in 2007, Bank of America calculated.

The deal is valued at 6.7 times the bank’s EBITDA (earnings before interest, tax, depreciation and amortisation) estimate for Lyondell this year (of $3.06bn) which is around the multiple average for current commodity-oriented transactions.

As always with deals of this type, there are other parts of the package that may be more or less attractive. But financier Len Blavatnik and his Access Industries look this time as though they can pull off the acquisition that will work financially and in terms of business integration and synergies.

There is not a lot of overlap between the Basell and Lyondell businesses and it looks as though this agreement can stick. Basell/Access Industries lost out on its bid most recently for US-based Huntsman to Apollo’s Hexion Specialty Chemicals.

Blavatnik first staked a claim on Lyondell in early May, when he took the option to buy just over 8% of Lyondell stock. His current offer for the olefins, propylene oxide and polyethylene (PE) major represents a 45% premium on the closing price of Lyondell’s shares on 10 May.

That sounds a lot but Lyondell will mean a lot for Basell.

Lyondell’s naphtha crackers in the US churn out vast quantities of propylene as well as ethylene and C4. Basell has 1.4m tonnes of PP capacity in North America and Mexico that is hungry for feed.

The lift Lyondell gives Basell in PE should not be underestimated although it may bring with it some headaches.

These are likely to be largely technology-related. Basell is buying back a 20% share in the Novolen PP technology venture, for instance.

Before it could be created as a joint venture of BASF and Shell in 2000, the EU regulatory authorities insisted that the technology venture be divested. Lyondell’s Equistar acquired a 20% stake.

In addition to this complication, Basell is acquiring former Quantum Chemical high density PE (HDPE) technology, which might be a step too far given the importance of its own process.

The US PE marketing base will be particularly important as the combined group begins to maximise leverage between its European and North America production and technology bases.

The petrochemicals downturn beckons with new ethylene and polyolefins capacity in the Middle East and Asia destined to shift global supply/demand balances from 2009. In 2007 and through most of 2008, however, the sector is expected to deliver above-average profitability.

Financing of the deal is not expected to present a problem for New York based Blavatnik, whose holdings include a stake in one of the largest oil companies in Russia, TNK-BP.

It is not clear what Basell might want to do with Lyondell’s 268,000 bbbl/day Houston refinery, which processes heavy, sour Venezuelan crude.

But Blavatnik has been looking to better integrate Basell in Europe and his upstream interest – in this instance in some former Shell refineries in France – has been noted.

Basell’s attractive offer to Lyondell shareholders rests on the future importance of Lyondell to the privately-held group.

“Lyondell’s competitively positioned assets, access to raw material and refining capacity are excellent complements to Basell’s diversified portfolio,” Basell CEO Volker Trautz has said.

Indeed, the combined portfolio is better balanced geographically. It is better integrated and offers its owner more opportunities for growth.

By: Nigel Davis
+44 20 8652 3214

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