Commentary: LANXESS/Chemtura deal is additive

Germany-based LANXESS is focused on building scale in a unique type of business with its planned €2.4bn acquisition of US-based specialty chemicals producer Chemtura.

The additives business has some interesting characteristics similar to another rapidly consolidating yet still fragmented sector – coatings.

Additives, like coatings, typically comprise a small cost in the overall product but provide a critical benefit. It is a business based on technology and technical service. Importantly, it also has low capital spending requirements, which allows for strong cash flow generation.

And demand for additives is relatively robust, growing at 3-4%/year, according to LANXESS, which views the business as among the most attractive in specialty chemicals.

LANXESS has steadily built up its Rhein Chemie additives portfolio through the years with acquisitions of Unitex (phthalate-free plasticizers, 2011), Darmex (rubber additives, 2011), Tire Curing Bladders LLC (2012) and the Thermphos site (flame retardants, 2013). Its portfolio includes lubricant additives, flame retardants and plastic/rubber additives.

LANXESS’ additives sales were around €850m in the last four quarters through Q2 2016.

With Chemtura’s additives portfolio of lubricant additives and flame retardants, combined sales will be around €2bn.

The compelling combination in the additives business, along with €100m in overall projected synergies by 2020, is getting attention in the investment community.

Shares of LANXESS surged 8.2% to €52.53 on 26 September, while Chemtura jumped 15.8% to $32.64, in light of the agreed buyout price of $33.50/share.

On 27 September, LANXESS rose a further 1.8% to €53.45. In today’s red hot chemical M&A market, LANXESS appears to be paying a fair price for Chemtura at around 10x EV/EBITDA (enterprise value/earnings before interest, tax, depreciation and amortisation). With expected synergies, the multiple drops to around 7x.

The Chemtura deal was facilitated by LANXESS’ formation of its global synthetic rubber 50/50 joint venture ARLANXEO with Saudi Aramco in April 2016 where LANXESS cashed out to the tune of €1.2bn.

While LANXESS CEO Matthias Zachert will focus on closing the Chemtura deal by mid-2017 and integrating the businesses, with no more mergers and acquisitions (M&A) activity during this phase, look for the company to actively engage in deals in the future.

“In the chemical industry, you always have to do active portfolio management,” said Zachert, in an interview with ICIS in New York. See the full interview on page 9.

“We have gone through an exciting transformation in the last two years. Let your fantasy develop in the next 2-3 years as we show what ‘energizing chemistry’ means. We will transform at high speed,” according to Zachert.

Chemtura itself has gone through a major transformation through the years, slimming down from a disparate set of businesses – ranging from agrochemicals, urethanes, lubricants, consumer cleaning products, plastic additives and organometallics – to a few core platforms.

This made it more understandable to investors, as well as more palatable to a potential buyer. Chemtura chairman, president and CEO Craig Rogerson has deftly led the company out of bankruptcy in 2010, and made a series of divestitures through the years.

These included the antioxidants business sold to SK Capital for $200m in April 2013, the consumer products unit sold to KIK Products for $300m in December 2013, and Chemtura AgroSolutions, which was sold to Platform Specialty Products for $1.0bn in November 2014.

Rogerson has made no bones about Chemtura’s future being part a larger company, whether it was through acquisitions or a sale to, or merger with another company. The combination with LANXESS appears to be a great strategic fit, with additives being the centerpiece.