Time is ripe for LyondellBasell Braskem combination

Source: ECN

2018/06/26

A merger between LyondellBasell and Brazil-based Braskem would create a colossal polyolefins producer – the world’s largest – with leading positions throughout the Americas.

On 15 June, LyondellBasell and Braskem’s controlling shareholder Odebrecht announced exclusive discussions on a potential transaction. Rumblings of merger talks initially emerged in a 30 October 2017 report in the Wall Street Journal.

It would be a stunning coup for LyondellBasell to merge with Brazil’s polyolefins champion. In one fell swoop, it would take over just about the entire Brazil polyethylene (PE) and polypropylene (PP) market, and much of the Mexico PE market through Braskem’s 75% stake in Braskem Idesa.

Brazil’s PE and PP sector has completely consolidated over the years into one national champion, which also has a substantial presence in polyvinyl chloride (PVC). High import tariffs in the order of 14% on these polymers insulate local producers.

In Mexico, Braskem Idesa operates the premier petrochemical complex featuring a 1.05m tonne/year ethane cracker and the same amount of PE capacity in Coatzacoalcos. Its only local competitor in PE is the state oil company Pemex, which has been beset by feedstock shortages and spotty production.

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And with trade tensions ratcheting up between the US and China, the US and NAFTA partners Mexico and Canada, and the US and pretty much everyone, it pays to have a highly diversified geographic production footprint.

LyondellBasell is a global powerhouse in PP and PE, being the third largest overall player – it is No 2 in PP and No 6 in PE worldwide, based on 2017 capacities, according to the company. The majority of polyolefins production is in the US and Europe. The company is the No 1 producer of PE in Europe, and No 1 in North America and Europe PP.

Braskem owns the Brazilian market in both PE and PP and also has a significant presence in PP production in the US, with facilities acquired from Sunoco in 2010 for $350m and from Dow Chemical in 2011 in a $323m deal. It also picked up plants in Europe with the Dow deal.

Braskem is also the only company building a PP project in the US – a 450,000 tonne/year facility in La Porte, Texas set to start up by the first quarter of 2020.

LyondellBasell had been exploring a 500,000 tonne/year PP project in the US, with a final investment decision planned for early 2019.

Brazil’s construction and industrial conglomerate Odebrecht has a 38.3% equity share in Braskem, and a controlling 50.1% voting stake.

Odebrecht was at the heart of the country’s widespread Lava Jato corruption scandal, and is on the hook for Brazilian reals (R)3.8bn ($1.0bn) in fines to the governments of Brazil, the US and Switzerland over 23 years. And it has been selling off assets to pay down a heavy debt load. Braskem itself has agreed to pay R3.1bn in fines to the countries.

The other major Braskem shareholder is Brazil’s state operated oil and gas company Petrobras, with a 36.1% equity share and 47% voting stake.

With major concessions on fuel prices Brazil’s government has granted after the crippling trucker strike, Petrobras has greater motivation to sell off noncore assets to fund its substantial capital needs to develop the pre-salt offshore oil and gas deposits.

The timing now appears to be right for both Odebrecht and Petrobras to divest their Braskem stakes. However, they will likely want to reap some of the benefits of the powerful combination of LyondellBasell and Braskem.

Wells Fargo analyst Frank Mitsch models a potential $18.4bn enterprise value buyout of Braskem with a base case scenario of LyondellBasell issuing 60% of the total outlay in equity, and 40% in debt.

With an estimated $250m in cost synergies in the first year, the deal would be accretive to LyondellBasell’s earnings per share by 4%, in his analysis.

In an “upside case” where LyondellBasell uses just 30% in equity and 70% in debt, the deal would be accretive by 16% in the first year.

Strategically, there’s no question this deal makes sense for both LyondellBasell and Braskem, adding scale and geographic reach and diversification in PE and PP, leveraging technologies and offering significant cost synergies.

Now with Petrobras more motivated to sell, all the pieces of a successful deal may finally be in place.