Evonik gets ‘gigantic’ return on MMA sale

The €3bn deal value for the sale of Evonik’s methacrylates business exceeded market expectations and gives additional flexibility for the Germany-based specialty chemicals producer’s growth plans, said CEO Christian Kullmann.

Evonik announced the sale of the business to US-based private equity firm Advent International late on 4 March as part of its drive to reduce exposure to more cyclical businesses in favour of specialty chemicals, with completion expected by the end of the third quarter 2019.

The sale includes Evonik’s methyl methacrylate/polymethyl methacrylate (MMA/PMMA) operations, Acrylic Products and CyPlus cyanides product lines, and some methacrylate resins.

PRICE BEYOND EXPECTATIONS

The price tag represents a multiple of 8.5x on the business’ earnings before interest, tax, depreciation and amortisation (EBITDA), a higher valuation than analysts had been guiding for, and which gives the company a greater degree of financial stability, according to Kullmann.

“The markets saw a price of €2.5bn for [the] MMA [unit], but it achieved €3bn – this is gigantic… [and] gives scope and freedom for further development of the company going forward,” he said, speaking to reporters in Essen.

Advent International is also honouring Evonik’s pledge to exclude forced redundancies from the business until 2023.

Evonik’s share price rose 2.9% on 5 March, despite the company announcing negative Q4 2018 results on the back of weakness at performance materials and logistical costs associated with low water levels on the River Rhine during 2018.

The sale price includes €500m in pension liabilities that Advent has agreed to take on, while the book value of the asset – reflecting the net value of an asset minus liabilities – is €1bn, according to Evonik CFO Ute Wolf.

The sale value allows the company to finance its $625m purchase of PeroxyChem without further bond issuances, helping it to retain a strong investment grade among ratings agencies – a priority for Evonik, Wolf added.

Proceeds are also earmarked for growth projects, including Evonik’s investment in new polyamide 12 production capacity at its Marl, Germany, production site.

Evonik had groomed the MMA business for sale over the course of several years, according to Kullmann, working in 2016-2017 to drive down production costs and restructure the business, with the goal of creating a MMA/PMMA “verbund” structure before announcing in March 2018 that it was exploring options for the unit.

The business generated an average annual earnings before interest, taxes, depreciation and amortisation (EBITDA) of about €350m on sales of about €1.8bn/year in 2016-2018 and Evonik expects similar levels for 2019.

However, the three-year average does not fully convey the extent that strong margins along the methacrylates value chain drove performance materials division profitability in 2018.

Analysts projected that around €400m of the €670m performance materials EBITDA in 2018 would be from MMA/PMMA sales, and Evonik forecast that earnings would fall by €150m in 2019.

“The methacrylates business benefited from a positive supply/demand situation, and we believe the point in time for the divestment was just perfect,” Wolf added.

Chemicals equity analysts at London-based Bernstein Research said the price tag achieved by Evonik, which represents around 10x EBITDA when an average of the period 2015-2018 is calculated, represented a real achievement in the current economic cycle.

“Divesting a commodity business for 10x EV (enterprise value)/EBITDA at this point in the cycle is impressive,” said Bernstein.

The methacrylates business has 18 production sites and 3,900 employees worldwide.

FEW ECONOMIC TAILWINDS

Little momentum is expected from the global economy for Evonik in 2019, as Kullman projects overall earnings to be stable to softer as compared to 2018.

Global GDP growth is expected to slow this year, with volatile commodity prices, the US-China trade war, Brexit, and frostier relations between the EU and the US all weighing on sentiment and demand growth, the CEO noted.

“This year we expect no major tailwind from the economy. The things we saw in 2018, especially political turmoil, are set to continue. We see growth but weaker than before,” said Kullman.

“The growth engines with Evonik are intact. In core businesses we expect sales and earnings increases – this is what we have actually set out to achieve this year,” he added.

Nevertheless, the bearish economic environment, which has seen consistent downgrades for projected EU growth by the IMF and European Commission, is an issue for the sector, with some developments that would have been impossible to predict a few years earlier.

“Could you have imagined that the American President would seriously discuss whether German cars were a national security risk, similar to Al-Qaeda?” Kullmann added.

The company posted adjusted EBITDA of €2.6bn for 2018, at the low end of its upgraded €2.6bn-2.65bn guidance range, with resource efficiency, nutrition and care, and performance materials division profitability all increasing.

“What we achieved in 2018 is really boring,” Kullmann said. “We simply delivered last year what we promised before and what we announced.”

Less predictable was the announcement of the long-awaited sale of Evonik’s methacrylates business to Advent International for €3bn, significantly above the market consensus of €2bn-2.5bn.

The sale represents a multiple of 8.5x 2018 earnings, according to Evonik, and 10x average 2015-18 earnings, according to research firm Bernstein.

The valuation is higher than Evonik itself paid for PeroxyChem – a 7.8x multiple, according to Kullmann – and for J.M.

Huber’s silica business, which fetched a 7x multiple, but around the 9.9x paid in its $3.8bn purchase of Air Products’ performance materials division in 2017.

GROWTH INITIATIVES

With funds earmarked from the sale to finance the company’s $625m purchase of US-based PeroxyChem, fund its planned new polyamide 12 unit in Marl, Germany, and improve the company balance sheet, the company is looking at other growth projects, according to the CEO.

“With our M&A strategy we are not going down the path of heroes,” said Kullman.

“Our strategy is based on operating markets where we are top in the world… where we know the technology position, we have top positions in those markets and we want to extend that.”

The focus of Evonik’s strategy is on four key areas – animal nutrition, personal care, smart materials and specialty additives – all with sales of €3bn-4bn and targeted returns of 10-20%, with the future model for the company based around 80% of sales coming from those core sectors.

The company is looking to broaden its geographic spread as it shifts its portfolio away from cyclical business lines, with 40% of revenues currently from Europe.

“We also have to look at the background of the changing world political arena,” Kullmann had said.

“Multilateralism will come to an end for sure. To be more present in core markets [you] have to achieve new balance.”

Despite caution on earnings forecasts, demand in the first quarter has been relatively favourable, according to Kullmann, and the current momentum points to the company equalling 2018 earnings if the global environment does not deteriorate further.

“We got off to fairly good start into Q1, [and that] makes us quite confident… because we believe from the present perspective that we will indeed get close… to our prior year performance,” Kullmann added.