Commentary: Westlake buyout of Vonnolit appears opportunistic

02 June 2014 00:00 Source:ICIS Chemical Business

US-based Westlake Chemical’s planned €490m ($666m) acquisition of polyvinyl chloride (PVC) producer Vinnolit from private equity firm Advent International will mark its entry into the European market, and transform it into a global player. While it’s hardly surprising that Westlake would buy PVC assets, the deal appears to be an opportunistic one, as Europe is far less cost advantaged in integrated PVC production than Westlake’s home base in the US.

All six of Vinnolit’s plants are in Europe – five in Germany and one in the UK with combined PVC capacity of 780,000 tonnes/year, along with 665,000 tonnes/year of feedstock vinyl chloride monomer (VCM) capacity, and 475,000 tonnes/year of chlorine co-product caustic soda. Vinnolit also licenses suspension PVC (S-PVC) and ethylene dichloride (EDC)/VCM technology. The company generated sales of €917m ($1.25bn) in 2013 with 90% coming from Europe.

WESTLAKE/VINNOLIT DEAL STATS

  • Deal value: €490m ($666m)
  • Vinnolit sales: €917m ($1.25bn)
  • EBITDA multiple: Around 6x
  • Vinnolit PVC capacity: 780,000 tonnes/year
  • Westlake PVC capacity: 771,000 tonnes/year
  • Combined PVC capacity: 1.55m tonnes/year
  • Combined vinyls sales: $2.45bn

NOTE: Sales and EBITDA multiple figures based on 2013 results
SOURCE: Westlake, Advent International, ICIS analysis

The deal would catapult Westlake from the #12 position in global PVC capacity, to #6, according to the company. All of Westlake’s PVC and downstream plants are in the US where it enjoys a cost advantage based on shale gas – not only for power used to produce feedstock chlorine in an energy-intensive process, but also ethane to produce PVC’s other ­feedstock ethylene.

Westlake’s PVC capacity is around 771,000 tonnes/year, according to its 10-K annual filing with the US Securities & Exchange Commission. The company also has capacity of 839,000 tonnes/year of VCM, and 624,00 tonnes/year of caustic soda along with 567,000 tonnes/year of chlorine. Total sales in its vinyls business, excluding the building products portion, were $801m in 2013. Including building products, vinyls sales were $1.2bn.

While Westlake highlighted the specialty nature of Vinnolit’s PVC business, the deal could have more to do with an attractive price.

With respect to its specialty aspect, UBS analyst John Roberts noted that about 25-30% of Vinnolit’s sales “appear more differentiated”, as in non-pipe or building-related applications.

Westlake is buying Vinnolit for around 6 times 2013 earnings before interest, tax, depreciation and amortisation (EBITDA), it said in a presentation.

“It is a little surprising given Westlake’s view of the US as the preferred place to invest given both the cost advantages as well as the relatively healthy economic environment. Europe is less attractive on both fronts,” one investment banker said. “However, the price was probably a big factor in their thinking. Advent has owned Vinnolit for many years and has been struggling to exit the investment. That accounts for the price that they sold it for.”

At an estimated EBITDA of €81.7m for Vinnolit in 2013, its EBITDA margin was 8.9%. We do not have an apples-to-apples EBITDA comparison for Westlake’s vinyls business, but margins were far better. Its operating income margin for vinyls (including building products) was 12.8% in 2013. This does not even include adding back taxes, and depreciation and amortisation (to get to what would be a higher EBITDA margin).

However, the deal could provide Westlake exposure to any rebound in the European construction market, as well as give it an opportunity to consolidate the market at a time ripe for it.

INEOS and Solvay are in the process of completing a merger of their European PVC businesses, a combination that requires the sale of a number of PVC assets to meet regulatory terms.

“Westlake has been interested for some time in moving outside North America to transform itself into a global company. A move into European PVC is very logical, particularly given that the construction market in Europe shows much greater upside potential than downside risk,” said Peter Hall, partner at investment bank The Valence Group.

“The European sector also offers very significant structural upside from consolidation. The market is currently relatively fragmented and there is significant value to be captured by those players seeking to drive consolidation. The INEOS/Solvay assets represent another opportunity for someone to acquire high quality assets in a market where the upside potential more than counterbalances the downside risk,” he added.

By Joseph Chang