LONDON (ICIS)--Clariant has pulled out all the stops on its joint ventures with SABIC to transform the company after the failed merger with US peer Huntsman and activist investors’ pressure which prompted the Swiss chemicals major to reinvent itself.
SABIC – owned 70% by the Saudi sovereign wealth fund – controls 24.99% of Clariant, and the largest operation coming out of the tie-up has been the intention to create a joint venture for the production of high performance materials, announced in September.
Both companies would place assets into the new entity, which is not expected to be running until at least the end of this year.
Clariant would gain access to both SABIC’s global network, one of the world’s largest, and cheaper raw materials, while the Saudi major gains access to more downstream businesses as the country continues to diversify its economy away from crude oil production, as part of its so-called Saudi Vision 2030.
Together with the high performance unit, the two companies have announced they are mulling a joint venture for the production of alkoxylates in Saudi Arabia, in a tie-up between Clariant and SABIC subsidiary Kayan.
However, the high-performance materials joint venture will not come cheap for Clariant, and the company’s future will be highly linked to it for years to come. In order to fund this operation, Clariant is to sell important chunks of its business.
By 2020, the company is to divest its pigments, standard masterbatches and medical specialties businesses, which will not be included in the newly-formed high-performance materials unit.
“Depending on the definitive valuation which is to be determined by both parties in the coming months, an equalisation consideration will be made by Clariant to SABIC,” said the company in September.
The previous CEO Hariolf Kottmann said at the time he expected to raise between Swiss francs (Swfr) 1.5-1.6bn ($1.5-1.6bn) from the planned divestments, as reported by news agency Reuters, which would come handy for the equalisation consideration to be paid to SABIC.
Clariant has high hopes for the high-performance materials joint venture. By 2021, it expects sales to come at Swfr4bn, compared to pro-forma sales of Swfr3bn in 2017.
The earnings before interest, taxes, depreciation and amortisation (EBITDA) margin is expected to increase to around 24-25% by 2021, compared to the pro-forma figure of 19.4% in 2017, said Clariant. The multiples are certainly high for the chemical industry.
However, some analysts estimate that the high performance materials unit could be as much as 40% of Clariant’s EBITDA when it is up and running, but only 50% of that would be for Clariant’s shareholders, according to Andreas Heine, an equity chemical analyst at MainFirst.
“From a company point of view, Clariant will be larger and have a higher margin, but the improvement on earnings is something the company will need to work on: on one hand, getting synergies [to lower costs] and, on the other, to get the growth,” said Heine.
“From the beginning, the portfolio would be a higher margin business. If the synergies come by 2021 and the growth comes as expected by the company, and provided that there is guidance for each division, Clariant will look very different in 2021 from what it looks like now.”
TWO YEARS THAT CHANGED
For those who enjoy an activist investor saga, Clariant did not disappoint throughout 2017.
Activist investor White Tale had long demanded Clariant’s board to be changed in order to bring fresh air into the family business-like company and, like any investor seeking higher returns, it demanded splitting the company in order to get rid of assets which, in their view, were dragging the share performance down.
It all accelerated after Clariant dropped plans to merge with US chemical major Huntsman in October 2017, just five months after announcing what looked like a reasonable merger at the time to some analysts.
Clariant’s management plan became history and activist investors continue piling up pressure – as well as a higher stake in the company through consistent small acquisitions.
Frantic activity in search of a plan must have started at the headquarters of the company in the small Swiss town of Muttenz, near Basel.
An old name in the chemical industry, Kottmann had a good contact list to start calls and find a saviour. The company needed someone with deep pockets who was willing to pay the activist investors their stake in Clariant.
Although management was still claiming by the summer of 2018 that they would stay put, the failure to undertake the merger with Huntsman had taken its toll.
Kottmann needed a dignified way out, and he found it. SABIC’s petrodollars got the crown, as its Swfr2bn payment for its 24.99% stake allowed it bring in Ernesto Occhiello (pictured) to the top position, and give Kottmann the position of chairman of the board.
SABIC’s CEO confirmed to ICIS in October 2018 that “around $2bn” had been paid to the activist investor for the Clariant stake.
The activist investors’ aim to make their investments profitable did pay off: during 2017, Clariant’s shares jumped to nearly Swfr30/apiece – most likely the price paid by SABIC. (See bottom graph for share price from 1 January 2017 up to date.)
In 2018, the shares fell “incredibly fast and a lot”, according to MainFirst’s Heine, with one reason for this potentially being investor scepticism about the growth targets set up by Clariant for the new high performance materials unit.
“After the first deal [with US Huntsman] failed there have been some arguing over this [growth targets],” he added.
It was a seismic change for Clariant: SABIC was by all means a strange bedfellow to come to its rescue.
While talk of the Saudi major increasing its stake in the company has been persistent, some analysts think that Saudi Arabia’s push for its long-term vision would make Clariant “peanuts” in the larger, state-backed plans for the future.
“I think at first we’ll need to find out where they stand on their own, because there are plans for Saudi Aramco [Saudi Arabia’s state-controlled crude major] and SABIC to merge: first, these two companies need to find out what their future set up will be and what their priorities are,” said MainFirst’s Heine.
“If you look at that, Clariant is really just peanuts and nothing strategic at all. Then, they [SABIC and Saudi Aramco] have to consider if getting an even larger stake in Clariant fits to their long-term plan. I wouldn’t exclude this in the long term, but in the next three to five years this will not be a priority.”
US-CHINA TRADE WAR
A geopolitical worry for Clariant in 2019 will be the protectionist push by US President Donald Trump. The Swiss producer's healthy catalysts division has the US as one of its key markets, and it produces catalysts there which it also exports to China.
Before he left his post, the previous CEO said in July 2018 the company was mulling moving production from the US to China or India.
The Swiss company is due to publish its fourth-quarter and full year financial results on 13 February.
For full-year annual results, consensus by chemical equity analysts expects Clariant to post Swfr6.72bn in sales, and Swfr1.03bn in EBITDA.
These figures would compare to sales of Swfr6.38bn in 2017 and EBITDA of Swfr974m.
ICIS will publish an interview with Clariant's CFO Patrick Jany on 14 February.
Pictures sources: Creativ Studio Heinemann/imageBROKER/REX/Shutterstock and Clariant
($1 = Swfr1)
Focus article by Jonathan Lopez