The layout of the Pasir Gudang complex
Source of picture: Titan Chemicals
By John Richardson and Malini Hariharan
HONAM Petrochemical's plan to buy Malaysia's Titan Chemicals for $1.5bn - which was announced today - is likely to be followed by further buys, including a refiner, an industry observer has told the blog.
"I am neutral on this deal because Titan, like Honam, has to buy in its naphtha feedstock so integration isn't good at the moment," he added.
"But the Lotte Group (Honam's parent company) is looking at a refinery acquisition which would solve the integration problem. They are also looking at more downstream chemicals companies.
"Lotte is very aggressive and wants to raise turnover to Won40 trillion by 2018. Turnover, if you include Titan, will only be Won12 trillion this year and so they have a lot further to go in their acquisitions strategy."
The price for Titan is an average of 5-6 times Titan's EBITDA over the last seven years, he added.
Honam has bought 73% of Titan for major shareholders, which included Taiwan's Chao Group.
"The last seven years were exceptionally good for the industry. Will the next seven years be as good? Possibly not, and Honam might have been able to get a better price by waiting until later this year, when we are likely to be into a severe petrochemicals down cycle," said the observer.
But Honam gets, through Titan, better access to the Association of Southeast Asian Nations (ASEAN) market through the ASEAN Free Trade Agreement. It is also set to benefit from the ASEAN-China free-trade deal.
The acquisition is the first by a South Korean petrochemical company overseas and the biggest so far by Honam. Its previous buys were in South Korea and were of Hyundai Petrochemical and KP Chemicals.
Honam's products include polyethylene (PE), polypropylene (PP), polyethylene terephthalate (PET), polycarbonate (PC) and ethylene oxide/ethylene glycol (EO/EG).
The deal comprises the Titan cracker complex in Pasir Gudang, Malaysia, which sells benzene, toluene, polyethylene (PE), polypropylene (PP) and butadiene and PT Titan - the Indonesian PE producer.
PT Titan, formerly called PT Peni and originally under BP ownership, had been bedevilled by lack of captive ethylene supply until Titan took over and began shipping feedstock from its Malaysian complex.