Titan acquisition gives Honam potential to become petrochemical giant

28 July 2010 22:14  [Source: ICB]

Titan Chemicals acquisition gives the South Korean major potential to become a petrochemical giant

Honam Petrochemical's decision to acquire Malaysia's Titan Chemicals is a vital step in the South Korean major's strategy to strengthen its competitiveness in the petrochemicals business and enhance its overseas ­presence.

Honam, part of the Lotte Group, signed an agreement on July 16 to buy 72.32%, or 1.25bn shares, of Titan from the Chao Group of Taiwan and investment group Permodalan Nasional Bhd for M$2.94bn ($910m) or at M$2.35/share. Honam hopes to acquire Titan's remaining shares by end-November and plans to take the company private.

The rationale for the $1.3bn (€1bn) purchase is to boost Honam's competitiveness by ­securing economies of scale, said a source close to the firm, which has an ethylene capacity of 1.75m tonnes/year in South Korea.

EXPANSION IN THE CARDS
"Titan's crackers are small, but they have found that there is potential to increase capacity by revamping them," said the source, who added that Honam would determine the capacity increase after the deal is closed. Titan's No. 1 cracker has a capacity of 285,000 tonnes/year, while the No. 2 cracker can produce around 435,000 tonnes/year.

It is possible to expand the capacity of the two crackers at Pasir Gudang, Malaysia, to 600,000 tonnes/year each, he added. Downstream plants would also be expanded and new derivatives could be introduced at the site, he said, adding: "The expansions will be based on Honam's expertise and experience in the petrochemicals sector. Synergy is also possible in management of the complex, marketing and sales."

The Titan deal, subject to regulatory approvals, would allow Honam to expand its presence in the Southeast Asian market. Besides operations in Malaysia, Titan has a 450,000 tonnes/year polyethylene plant in Indonesia. The two countries accounted for 72% of Titan's polymer sales revenue of M$1.292m in Q1 2010 (see graph).

Honam Petrochemical – Ongoing Investments
PROJECT	COST (WON)	PRODUCT	CAPACITY	LOCATION	MECHANICAL COMPLETION
Butadiene (BD)/butene-1	150bn	BD Butene	130,000 24,000	Yeosu, South Korea	Q4 2010
Naphtha cracker expansion	520bn	Ethylene High density polyethylene (HDPE) Polypropylene (PP)	250,00 250,000 200,000	Yeosu, South Korea	2012
Ethylene oxide/Ethanolamines	165bn	Ethylene oxide Ethanolamines	1000,000 50,000	China	2012
Uzbek project	$96m	Ethylene HDPE PP	400,000 380,000 80,00	Uzbekistan	2013
Source: Honam Petrochemical

In terms of valuation, some ­financial analysts believed that Honam would have obtained a better price if it had waited until the widely expected petrochemicals downcycle grips the ­industry.

"A lot of people think that the Titan deal is good for the company as the price is not too expensive," said Kim Jae Joong, an analyst with brokerage Woori Investments and Securities in Seoul.

"When you compare the total cost of the deal to the olefin production capacity of Titan, you will get around Korean won (W) 1.3m/tonne ($1,068/tonne), much higher than the W700,000/tonne you see on average at other Korean producers," Kim said.

"I am neutral on this [acquisition] deal because Titan, like Honam, has to buy in its naphtha feedstock so the integration is not good," said a second analyst. But the source close to Honam pointed out that the company is confident of managing the asset through the downcycle.

MORE M&A
Honam, which has actively participated in the restructuring of the South Korean petrochemical industry by acquiring part of ­Hyundai Petrochemical's assets in 2003 and KP Chemical in 2004, is keeping its eyes open for more opportunities in Asia in basic chemicals, intermediates and speciality chemicals, said the source.

"A lot of people think  that the Titan deal is good for the company as the price is not too expensive" Kim Jae Joong, Woori Investments and Securities analyst

Target segments include olefins, polyolefins, EO derivatives and environment-friendly chemicals, he added. Honam's interest in moving beyond South Korea can also be gauged in the list of projects that it is pursuing.

It has taken a share in a cracker joint venture (JV) in Uzbekistan that is due to be completed in 2013. In China, where Honam is keen to establish a production and marketing platform, it is building an EO and derivatives project.

And in the Middle East, although its cracker and derivatives JV with Qatar Petroleum has been shelved, the source said the company would continue to pursue other opportunities in Saudi Arabia and Qatar.

Additional reporting by Pearl Bantillo and Nurluqman Suratman in Singapore

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By: Malini Hariharan
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