Rockwood faces valuation challenge in sale of TiO2 business: banker

16 September 2013 23:55  [Source: ICIS news]

By Joseph Chang

NEW YORK (ICIS)--US-based Rockwood Holdings faces a major challenge in selling its titanium dioxide (TiO2) business at an attractive price, an investment banker said on Monday.

“It seems to be a very difficult situation for Rockwood, where the only potential buyer would be Huntsman. It all comes down to what Huntsman wants to pay, and Huntsman doesn’t pay full price for anything,” said the banker.

Private equity firms would be constrained by the fact that they would have to borrow against the cash flows of the TiO2 business, which have been reduced over the past year, he noted.

“Rockwood would probably get a higher price from Huntsman. Private equity can only leverage against the cash flows of the business, while Huntsman can leverage off its diversified asset base,” the banker pointed out.

Rockwood’s TiO2 business generated just $33m (€25m) in adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) in the 12 months up to the second quarter of 2013, for an EBITDA margin of just 3.3% based on sales of $1.0bn.

Wall Street has speculated on a Huntsman buyout of Rockwood’s TiO2 business for months.

On 14 August, following a meeting with Jim Fisher, a consultant and TiO2 expert with IBMA, Wells Fargo analyst Frank Mitsch noted in a research report: “It is believed that Huntsman is currently evaluating Rockwood’s TiO2 assets and would be the only party interested in Rockwood (according to IBMA).”

Both Huntsman and Rockwoods’s TiO2 assets are primarily based on sulphate process technology, and about 70% of Huntsman’s TiO2 business is in Europe, along with all of Rockwood’s TiO2 assets, noted Mitsch, citing IBMA.

DuPont, the world leader in TiO2, is also evaluating options for its TiO2 business, including a sale.

Rockwood sold its advanced ceramics business CeramTec to European private equity firm Cinven for €1.49bn on 4 September, and it is also seeking to divest its performance additives business, which includes color pigments and services, clay-based additives and timber treatment chemicals.

Its performance additives business generated $122m in adjusted EBITDA in the 12 months up to the second quarter of 2013, for an EBITDA margin of 17.4% based on $700m in sales during the period.

Rockwood could be trying to package its TiO2 assets along with its performance additives business in a sale, noted the banker.

Divestitures of these businesses would leave Rockwood with its core lithium and surface treatment businesses, which had much higher EBITDA margins of 38.6% and 21.9%, respectively, in the 12 months up to Q2 2013.

However, it is unclear if the asset sales would ultimately create value, especially as it would be difficult to secure an attractive valuation for the TiO2 assets, said the banker.

“Rockwood appears to be executing a value maximisation strategy that doesn’t fit the current situation,” he noted.

Rockwood, as a publicly traded company with a stock market capitalisation of $5.0bn and net debt of $1.9bn against last 12 months EBITDA of $657m, is trading at an EV/EBITDA (enterprise value/EBITDA) multiple of 10.5 times, a relatively robust level for a chemical company.

Although North American TiO2 customers have been aware of Rockwood’s efforts to divest its pigments businesses, most were unaware that Huntsman was being touted as the buyer.

“I had not heard this,” a pigment customer said. “I knew Rockwood was trying to sell that business, but I was expecting the buyer to be Cristal.”

Another buyer suggested that the sale of Rockwood’s TiO2 business to Huntsman would have little or no effect on any of the North American markets, because Rockwood is a leading supplier of anatase TiO2, which is used more often in food, pharmaceuticals, and in paper and polyester fibres rather than in the much larger architectural coatings market.

($1 = €0.75)

Additional reporting by Larry Terry in Houston

By: Joseph Chang
+1 713 525 2653

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