FocusAshland, Dow, DuPont seek better portfolio through sales

08 August 2013 21:58  [Source: ICIS news]

Ashland, Dow, DuPont seek better portfolio through salesBy Al Greenwood

HOUSTON (ICIS)--Within days of one another, Dow Chemical, DuPont and Ashland all announced that they were considering divestments of business units, potentially putting a huge bloc of assets on the market.

But outside of the timing and the general purpose of the announcements, the companies are considering the divestments for very different reasons, said Peter Young, president of Young & Partners, a chemicals and life-science investment bank.

The rush of announcements started on 23 July, when DuPont said it is considering spinning off or selling its performance chemicals business, which includes fluoropolymers and titanium dioxide (TiO2).

On 25 July, Ashland said it has started the process of selling its elastomers business, which includes styrene butadiene rubber (SBR).

That same day, Ashland also said it is considering selling its water technologies business.

Also on 25 July, Dow Chemical said it may create joint ventures or sell its epoxy resins, commodity chlorine derivatives and European building and construction businesses.

For their own reasons, each company has found that these particular businesses no longer fit their portfolios, Young said.

DuPont is considering a spin-off or sale of its performance chemicals business because the company wants less exposure to cyclical markets, Young said.

He noted the comments made by DuPont CEO Ellen Kullman during the company's earnings conference call, in which she said that DuPont is moving toward other businesses such as nutrition that are more stable and less cyclical.

"Although performance chemicals and TiO2 have been an important part of DuPont over the years, it doesn't fit overall in the profile of what they want to be," Young said.

That does not mean that DuPont does not consider fluoropolymers or TiO2 leading businesses, Young said. DuPont's fluoropolymers business includes its well-known Teflon brand, and the TiO2 segment is the largest in the world.

Nonetheless, dominance in TiO2 has not protected the segment from the pigment's sharp price swings. The company reported a 12% year-on-year decline in Q2 net income, mainly because of lower TiO2 prices, it said.

In deciding to sell the performance chemicals business, DuPont could also be facing pressure from activist shareholders, although none of this has publically surfaced, Young said.

For Ashland, the move to exit its water treatment and elastomers businesses is another step in the company's decade-long makeover.

Back in 2003, chemicals made up about 17% of the company's revenue. At the time, the majority of the company's sales came from its asphalt, refining, distribution and lubricants business.

Over the years, Ashland has gone through a major makeover, with the goal of becoming a high-value specialty chemical company. Ashland has sold its asphalt business, its stake in a refiner and its distribution business.

It also began acquiring businesses, allowing the company to add specialty chemical businesses.

In 2008, it bought Hercules for $3.3bn (€2.5bn). This deal would provide the rationale for Ashland's second major deal, the $3.2bn acquisition of International Specialty Products (ISP) in 2011.

Many of Hercules's and ISP's products complement each other, in that different products are sold to the same end markets such as personal care, food ingredients and pharmaceuticals. Substantial portions of each were combined to create Ashland's Specialty Ingredients business.

During a 12-month period ending in June, Specialty Ingredients provided the company with margins of 21% in terms of adjusted earnings before interest, tax, depreciation and amortisation (EBITDA).

Chemicals now make up 75% of Ashland's sales.

However, other parts of the Hercules and ISP deals do not fit Ashland's high-value specialty chemical model, Young said.

"It was just a question of time when they would sell the elastomers business and the water technologies business," he said.

The water technologies segment has been on Ashland's radar since at least October 2012, when the company said the business had to improve.

In explaining the elastomers sale, Ashland CEO James O'Brien said it does not fit into the company's strategy of investing in high-growth, high-margin specialty chemical markets.

Although Ashland has been under pressure from an activist investor, it has affected at most the timing of the two divestments, Ashland said.

Unlike Ashland and DuPont, Dow Chemical's possible divestments and joint ventures have more to do with the structure of those businesses, Young said.

For the epoxy resins business, Dow CEO Andrew Liveris said competition from China and Asia is destroying margins for the product.

"We will continue to move away from competing against people that really don’t have the same financial metrics as our shareholders demand," Liveris said during a Q2 earnings conference call.

Chlorine derivatives, meanwhile, are behaving increasingly like commodities, Liveris said.

Unlike DuPont, Dow is not concerned about being in cyclical businesses, Young said.

"Dow is more than happy to own both specialty chemicals and strong commodity businesses that are cyclical," he said.

He added, "The issue is the structure changes of certain businesses in the competitive environment."

Dow's announcement differs from the others in that the company mentioned a possible joint venture as well as a sale, Young said. DuPont mentioned a spin off, while Ashland just mentioned a possible sale.

All three companies are considering sales in a mergers and acquisitions (M&A) market that has strengthened from last year, Young said.

As far as potential buyers, they will most likely be private equity firms, said Telly Zachariades, cofounder and partner of Valence Group, an investment bank.

Currently, such firms can borrow at low costs and at high multiples of the businesses' earnings before interest, taxes, depreciation and amortisation (EBITDA), he said.

PricewaterhouseCoopers (PWC) noted a similar trend in its recent merger and acquisition report.

PwC is starting to see more interest for chemical businesses among private equity firms. It expects that trend to continue as the economy improves.

($1 = €0.75)

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By: Al Greenwood
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