Margin squeeze roils US Huntsman/Hexion deal

19 June 2008 21:34  [Source: ICIS news]

By Al Greenwood

HOUSTON (ICIS news)--US producer Huntsman is struggling with some of the same tight margins as many of its chemical peers, a situation that could kill a proposed $10.6bn (€6.8bn) merger with Hexion Specialty Chemicals, an analyst said on Thursday.

"Huntsman's financial profile has weakened a bit," said Kyle Loughlin, chemical team leader at Standard & Poor's Rating Service (S&P).

To restore margins, Huntsman has announced price increases of up to 25%, following the example of several other chemical producers. 

Hexion, however, said that weakness is substantial enough to kill its proposed merger with Huntsman.

Hexion sued Huntsman on Wednesday in Delaware state court. Hexion maintains that Huntsman's finances have suffered through so much deterioration, any merger would produce an insolvent company.

As such, Hexion alleges it has met the criteria to abandon the merger without paying a $325m termination fee. In the suit, Hexion asks the court to waive the fee.

Hexion said the financial deterioration was based on Huntsman's segments for titanium dioxide (TiO2) and performance products. Hexion also points out deterioration in Huntsman's textile effects business - which is part of the larger materials and effects segment.

Regarding TiO2, all of the large producers are suffering through weakened margins, Loughlin said. "That doesn't come as a surprise, given the challenges and the low level of new housing starts in North America."

Loughlin was commenting on Huntsman's business segments, and not on Hexion's lawsuit.

Huntsman's TiO2 segment faced additional pressure because it relies on sulphuric acid to produce TiO2, Loughlin said. Sulphuric acid prices have recently soared as a result of increased demand from fertilizer producers.

Many of Huntsman's competitors rely on chlorine to make TiO2, Loughlin said.

Chlorine prices have fallen due to the slowdown in the US housing market. Chlorine is a feedstock for polyvinyl chloride (PVC), which is used in house construction.

For the first quarter of 2008, Huntsman's TiO2 segment reported $10.4m  in earnings before interest, taxes, depreciation and amortisation (EBITDA). That is down 56% year over year.

Regarding Huntsman's textile effects business, it recently reported softer retail conditions in Europe and increased competition, Loughlin said. "Raw materials also played a role."

In fact, Huntsman said higher raw-material costs substantially offset revenues for its larger materials and effects segment, which includes textiles. First-quarter EBITDA for the segment was $38.6m, down 32% year over year.

Regarding Huntsman's performance products segment, much of its weaker performance was caused by an extended, planned turnaround at its plant in Port Neches, Texas, Loughlin said.

Overall, Huntsman's financial profile has deteriorated in the past year, Loughlin said. "But I don't think this is that unexpected, given the general trends in the economy."

Indeed, Huntsman's polyurethanes segment is holding up well, due to its performance in Asia, Loughlin said. First-quarter EBITDA rose to $1bn, up 19% year over year.

In fact, Huntsman's overall mix of products and markets have helped it weather the recent economic downturn better than many of its peers, Loughlin said.

Over the years, Huntsman has sold off many of its business units that were more exposed to volatile petrochemical cycles, he said. As a result of the strategy, Huntsman's earnings rely on more value-added products made by fewer competitors.

"They went through a pretty dramatic transformation," Loughlin said.

S&P is still considering a possible downgrade to Huntsman's ratings, a position that is unchanged from nearly a year ago.

Other companies have also suffered through squeezed margins, but they lack Huntsman's diversity of products and markets, Loughlin said.

Georgia Gulf produces mostly vinyl products, and its sales have been concentrated in North America. Wellman, which is in bankruptcy protection, produces polyester fibre and polyethylene terephthalate (PET). Tronox produces just TiO2.

($1 = €0.64)

For more on products listed in this article, visit ICIS chemical intelligence
To discuss issues facing the chemical industry go to ICIS connect

By: Al Greenwood
+1 713 525 2645

For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.

Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.

Printer Friendly