Clariant dodges breakup fees in scrapped Huntsman merger

Source: ICIS News

2017/10/31

LONDON (ICIS)--The cancellation of merger plans between Clariant and Huntsman in the face of opposition from an activist investor means that the Switzerland-headquartered company is unlikely to be called on to pay millions in breakup fees, according to CFO Patrick Jany.

Clariant had been potentially on the hook for a $210m breakup fee if it had moved to scrap the deal on its own and an additional $60m charge if the planned merger with US-based specialties firm had been voted down at a planned extraordinary general meeting (EGM).

The mutual decision by the two companies to walk away from the deal on Friday means that those fees are at present no longer a factor

“We are in a situation where we mutually agreed to terminate the merger without any breakup fee for the group, so we saved on the $210m on the unilateral termination of the deal, and we also avoided the $60m which would have been due if the EGM had voted against it,” Jany said.

The company could still be liable for the $60m fee, according to the terms of the original merger agreement, if it ended up selling more than 35% of its portfolio to a third party in the next 18 months.

A divestment could represent one of the paths that White Tale may be interested in exploring. Although the firm has set out no new direction for Clariant, it has called for the company to enlist an independent investment bank to review strategic options for the business.

However, in the event of such a significant sale, the $60m penalty charge would not leave much of a mark, according to Jany.

“If you were to sell 40-50% of the group then it would add a few billions in income, and then the $60m would be an irrelevant amount, and would not penalise our shareholders,” he said.

The investment bank appointment is one of a list of several demands issued by White Tale. The firm, which represents hedge funds Corvex and 40 North, has also called for the power to have direct influence on group strategy and to elect three board members.

Clariant CEO Hariolf Kottmann, who noted on Friday that he has not yet heard a serious or logical alternative to the Huntsman merger, told ICIS that the company has been in constant contact with White Tale since the decision to scrap the deal.

White Tale’s demands will be discussed by the board of directors in coming weeks, but it can only recommend directorial appointments, with the final decision to be taken at the an annual general meeting (AGM) vote, potentially in mid-March 2018.

Calling the failed merger “a missed opportunity”, Kottmann said that the strength of Huntsman’s financial performance in recent quarters means a merger today would not be possible at the prices agreed in May.

“This deal made sense for the portfolio, it would have enabled us to do more portfolio moves to create immediate value for the shareholder, just look at Huntsman’s results [on 27 October]. Today we wouldn’t do the same deal at the same price, so it was a very good deal,” he added.

White Tale opposed the deal by building up its stake in Clariant to over 20%. The investor has not indicated whether it intends to maintain a stake of that size in the business now that the merger has been stopped, but Kottmann predicts that it may continue to build up its position.

“I would expect that White Tale would continue to increase their participation,” he said.

The cost of the merger will be finalised in coming weeks and will be incorporated into Clariant’s fourth-quarter results, Kottmann said. He declined to comment on how material the impact of those costs would be to its profits, except to state that the company maintains its guidance for the full year.

The company announced its strongest quarterly results in a decade on Tuesday, with net profit surging to $179m from $64m during the third quarter of 2016, which Jany attributed to a portfolio growing at above-market rates and firmer global growth.

“The economy is doing pretty well around the world, Europe  is very strong apart from the UK, Asia is good, the US is coming up, and even Latin America is slowly turning a corner,” he said.

“It is probably a bit too early to call, but if we have another good quarter we can probably say that Latin America is getting slightly better,” he added.

Some headwinds remained in the form of currency and raw materials volatility, but Clariant has been increasingly successful at passing price increases down the value chain.

“If you look at our whole year we should be able to neutralise increasing raw materials costs and pass on those price increases, some businesses faster than others,” Jany said.

The third quarter was a banner season overall for European chemicals producers, with analysts noting that many product portfolios are near the top of the market in terms of pricing and margin, but current conditions represent a degree of market stabilisation, according to Jany.

“I think we have suffered a bit in Q2,” he said. “Some businesses took a little longer to increase [in performance] than we would have wished, but Q3 already marks quite an improvement, so I would hope that the situation is starting to stabilise.

“I would not expect any dramatic further increases but rather a stabilisation of those effects,” he added.

Pictured above: Clariant and Huntsman's CEOs announcing their intended merger in May (source: Clariant)

Interview article by Tom Brown