Market outlook: Mexichem CEO makes big moves in M&A, PVC integration

CEO Antonio Carrillo Rule is taking on the challenges of closing and integrating two major global acquisitions and advancing the company’s back integration efforts

Mexichem’s chloro-vinyl plant in Altamira, Mexico Copyright: Mexichem

Polyvinyl chloride (PVC) producer Mexichem is on the move, signing two major deals in Europe and the US – one to build up its specialty PVC operations and the other to enter the US pipe manufacturing market. Key priorities for CEO Antonio Carrillo Rule are focusing on higher margin specialty PVC, and integration – both back into feedstocks and forward into manufacturing.

“Focusing on specialty PVC is important – the margins are better and the business has a more favourable outlook,” said Carrillo in an interview with ICIS at Mexichem headquarters in Tlalnepantla, near Mexico City on 14 August.

“We are not the largest producer of PVC and have no intention to be number one globally. We are number one in Latin America and want to continue growing our specialty business,” he added.

In 2013, Mexichem posted sales of $5.2bn, a figure that will rise significantly following the close of its latest acquisitions. The company also generated earnings before interest, tax, depreciation and amortisation (EBITDA) of $891m in 2013.

Carrillo defines specialty PVC as emulsion or paste PVC with a greater technology component for use in lower volume applications such as in automotive, flooring and medical, which require specific properties. Standard PVC is suspension PVC, mainly used for pipes in the construction sector.

On 5 August, Mexichem announced the acquisition of Germany-based PVC producer Vestolit for €219m from hedge fund SVP Global.

Vestolit, with total capacity of 415,000 tonnes/year at Marl, produces paste PVC for flooring, wallpaper and underbody protection for cars, as well as medical applications. It is also the only producer of high impact suspension PVC (HIS-PVC) for weather-resistant and energy-efficient windows.

Vestolit, which generated sales of €477m in 2013, fits in with Mexichem’s specialty PVC focus, along with its May $250m acquisition of US-based PolyOne’s vinyl dispersion, blending and suspension resin assets which also contain a major specialty component.

Potential synergies with Vestolit include the opportunity to produce more in Europe rather than shipping PVC from Mexico and Colombia to the region as Mexichem does now, said Carrillo on the conference call on its latest acquisitions.

The deal could also facilitate additional exports from Europe to Latin America, and Mexichem can apply technology from Vestolit to operations in the US, Mexico and Colombia, he said.

With the Vestolit acquisition, expected to close in October or November 2014, Mexichem would be the #2 global producer of specialty PVC, behind US-based Westlake Chemical, which bought out #1 specialty PVC player Vinnolit, also based on Germany, according to Carrillo. The €490m Westlake/Vinnolit deal closed in July.

Mexichem’s total PVC capacity will rise from a current 1.3m tonnes/year, to over 1.7m tonnes/year after the deal. Vestolit is already well back-integrated, with feedstock vinyl chloride monomer (VCM), ethylene dichloride (EDC) and chlorine production, along with joint venture salt mines, said Carrillo.

DURA-LINE ACQUISITION
On 18 August, Mexichem announced a $630m buyout of US-based Dura-Line, a producer of high density polyethylene (HDPE) conduit (tubes), duct and pressure-pipe products for the communications, energy and infrastructure industries. This marks Mexichem’s entry into US pipe manufacturing.

Dura-Line has manufacturing facilities in North America, India, Oman, Europe and South Africa. It is being sold by private equity firm CHS Capital, and the deal is expected to close in the third quarter of 2014. Dura-Line had 2013 sales of around $650m and purchases around 450,000 tonnes/year of PE.

Dura-Line will complement Mexichem’s Wavin PVC pipe production business based in the Netherlands, which it acquired in 2012 for €531m. It also gives Mexichem a full line of data communications products (wiring and casings) that it can offer in Europe, Carrillo said on the conference call. And these data communication products can also be offered in Latin America, where data infrastructure is growing quickly.

Dura-Line’s presence in India, South Africa and the Middle East will open cross-selling opportunities for Mexichem’s existing products, Carrillo said. Likewise, Mexichem can use Dura-Line’s large US presence to distribute its other products.

Dura-Line’s other major strength is in gas transmission pipe, which accounts for around 30% of its business. Energy reform in Mexico as well as new production in the rest of Latin America could result in higher demand for these products, Carrillo said.

FOCUS ON INTEGRATION VS M&A

Mexichem’s global headquarters in Tlalnepantla, Mexico Copyright: Mexichem

Mexichem will now focus its efforts on closing and integrating Vestolit and Dura-Line rather than making more acquisitions.

“We will focus in the near term to integrate and extract synergies and reduce debt/EBITDA [earnings before interest, tax, depreciation and amortisation] as soon as possible,” said Carrillo. “This does not mean not continuing to look for acquisitions. We won’t close the door on high value opportunities but we have to go below our internal target of 2 times debt/EBITDA.”

With the two acquisitions, Mexichem’s debt/EBITDA ratio will rise to 2.2-2.3 times versus 1.3 times at the end of the second quarter of 2014.

In the first 12 months after the deals close, Mexichem expects Vestolit to generate €30m-35m in EBITDA for a 8-9% EBITDA margin on sales, and Dura-Line to post $65m-70m in EBITDA for a 9-10% margin, barring any synergies, said the CEO.

The EBITDA margins of the businesses being acquired are far lower than Mexichem’s EBITDA margin of around 17% in 2013, but Carrillo sees significant growth and cost synergies from the assets bringing margins in line with current levels.

“Once the synergies are achieved, there should be no negative impact on our margins,” he said.

Mexichem primarily sees growth synergies from the deals, which include cross-selling opportunities, expanded geographic reach and technology transfer.

On the call, Carrillo held off analyst speculation that Mexichem would go after DuPont’s fluorine assets ahead of DuPont’s planned spin-off of its performance chemicals business, which includes fluorochemicals.

“We were not interested in buying all the fluorine assets. If anything, these were specific assets and products – not significant acquisitions. But I don’t want to speculate… You should not think of Mexichem going after those assets,” said Carrillo.

In the meantime, Mexichem is busy back integrating into key feedstocks VCM and ­ethylene – not via M&A – but through two major joint venture projects.

Mexichem’s VCM joint venture with Mexico’s state-owned oil and gas company Pemex called Petroquimica Mexicana de Vinilo (PMV) will more than double output after its first in a series of turnarounds, Carrillo said in the ICIS interview.

“In August we have shut down the VCM plant for 45-60 days to install the first round of improvements. We’ve been planning for this for a year now, and will restart in November,” he said. “We have two to three more shutdowns planned for 2015.”

The VCM facility at the heart of the Petroquimica Mexicana de Vinilo (PMV) joint venture has been producing far short of its 400,000 tonne/year nameplate capacity for 20 years, said the CEO.

“In 2013, VCM production was 126,000 tonnes. By year end, we expect the run rate to reach 280,000 tonnes/year,” Carrillo said.

By the end of 2015, when all the improvements are completed, the VCM facility should be producing “close to a run rate of 400,000 tonnes/year”, he added.

PMV, a 56:44 joint venture between Mexichem and Pemex, was formed in September 2013.

And Mexichem plans to apply Vestolit’s VCM production technology to its PMV joint venture. “Vestolit has VCM technology, and we can use this help on our PMV joint venture,” said Carrillo on the conference call.

US CRACKER UNDER CONSTRUCTION
And in the US, Mexichem’s 50:50 joint venture cracker project in Ingleside, Texas, with Occidental Chemical (OxyChem) is under way and targeted for completion in the first quarter of 2017.

“The cracker project is going very well. We received the permit in May, and the groundbreaking is done. It is funded and happening,” said Carrillo in the ICIS interview.

“We want to be fully integrated in PVC and capture the benefit of low-cost feedstock, Being integrated puts you in a much stronger position,” he added.

The cracker project called Ingleside Ethylene will have 544,000 tonnes/year of ethylene capacity. The ethylene will be used as feedstock to produce VCM at OxyChem’s existing facility at Ingleside. OxyChem has VCM capacity of 1.05m tonnes/year at Ingleside, according to the ICIS plants and projects database.

A large portion of the VCM would be sold and shipped to Mexichem’s PVC operations in Mexico.

Ethylene represents around 70% of the cost of PVC resin production, and 50% of standard PVC pipe production, noted Carrillo.

Additional reporting by Al Greenwood in Houston

MEXICO ENERGY REFORM ‘FANTASTIC’ – CARRILLO
Mexichem CEO Antonio Carrillo Rule is “very bullish” on the new energy reforms recently signed into law by Mexico President Enrique Pena Nieto.

“Energy reform for Mexico is nothing short of fantastic. We’ve been waiting for these structural changes for many years,” Carrillo said. “We are very bullish – not only on the impact for Mexichem, but for investment in Mexico. These are big changes.”

Mexico’s energy reforms open up the oil and gas, refining, electricity and natural gas liquids (NGLs) to private and foreign investment. In addition, Mexico is reforming its policies in telecommunications, labour and education.

“The first opportunity for Mexichem is on the electricity side,” said Carrillo.The company is developing two cogeneration projects in Mexico, said the CEO.

The latest, a $650m cogeneration project, was announced in July with partners Enesa Energia and Invenergy Clean Power for Mexico’s state oil and gas company Pemex in Cactus, near Villahermosa, Mexico.

The plant would have capacity of 530MW and is expected to start up in the first half of 2018.

“Now with the energy reform we can generate electricity and also sell any excess power. Before, we could not sell it,” said the Mexichem CEO.

Prior to the reforms, only the state owned utility CFE could sell electricity in Mexico.

The cogeneration plants would generate not only electricity for Mexichem and Pemex operations but have “a lot” left over, allowing for significantly improved economics, he noted.

In the long term, electricity costs could also fall as natural gas production increases from greater investment and new power plants are built, Carrillo said.

The second opportunity would be in building additional petrochemical production, the CEO said.

“On 18 August, the company brought in Gerardo Alvarez to head its Mexichem Energy business unit. “This already includes the two cogeneration projects, but we will also develop a business plan to see where Mexichem fits and adds value within the new energy reforms,” said Carrillo.

“This will likely be on the petrochemical side” and could include further ethylene expansions, he added.