Hexion to seek transformational deal and bolt-on acquisitions

NEW YORK (ICIS)–US-based adhesives, coatings and composites producer Hexion is seeking a transformational deal, along with smaller acquisitions, to boost its specialties component, its CEO said on Friday.

“We continue to look at opportunities, whether they are bolt-on acquisitions, which would be more on the technology side or buying new products that are further along in the development chain, or looking at more transformative transactions – combinations that may make sense and allow us to lean more towards the specialty side of the house,” said Hexion CEO Craig Rogerson in an interview with ICIS.

“We’re certainly listening. The bankers and others are eager to talk and bring us ideas but we’re also looking at things that may make sense and being proactive in talking to potential partners,” he added.

Hexion is still focused on reducing debt levels, having come out of bankruptcy in July 2019 with a ratio of about 4x in terms of debt/EBITDA (earnings before interest, tax, depreciation and amortisation). Earlier, the ratio had been as high as 8x, he noted.

The pandemic hit Q2 results hard, and even as the performance has rebounded strongly since, leverage was elevated at 6.1x net debt/EBITDA as of the end of September 2020 when net debt was $1.675bn.

Transformational deal aspects
Thus, any transformational deal would have to involve equity or be a merger of equals rather than a traditional buyout, the CEO said.

“We can certainly do bolt-on acquisitions but a big transformative acquisition [using] our balance sheet is probably not what makes the most sense… So we’re looking at ways to do that using the equity – some kind of merger of equals or something like that as a more likely approach,” said Rogerson.

“And without the phenolic business, we’re a little bit more of a clean portfolio – there’s two clear segments of the business – and so that’s caused a lot more activity relative to talking, and we’ll see if it turns into action. But clearly we’re one of those potential suitors that makes sense to a number of people,” he added.

Hexion is in the process of selling its phenolic specialty resin, hexamine and European-based forest products resins business for around $425m ($335m in cash plus assumed liabilities and future earn-outs) to investment firms Black Diamond and Investindustrial. The deal is scheduled to close in Q1 2021.

The company is unlikely to make any more major divestitures as scale is still important. On the epoxy resins side, the company is back integrated to epichlorohydrin (ECH) and bisphenol-A (BPA) in Europe and to BPA in the US which is considered an advantage, said Rogerson.

Specialty versus commodity considerations
Hexion considers its adhesives segment (49% of sales) more specialty, and its coatings & composites (epoxy resins-based, 51%) more commodity but with portions of the latter being specialty such as bonding pastes for wind turbines as well as coatings.

Rogerson estimates around 40% of Hexion’s business is commodity and would like that percentage to shrink. So if major divestments on the commodity epoxy side are not in order, the only way to reduce the percentage is to get bigger through organic growth or through specialty bolt-on acquisitions or a transformative deal with a specialty-oriented company, he pointed out.

In the 12 months through the end of September 2020, the company had total sales of $2.49bn with its largest end markets in home construction (20%), wind energy (16%), general construction (13%) and furniture (8%).

In terms of a transformational deal, some potential partners are on the adhesives side, with others more towards the epoxy resins side, he noted.

“That’s another challenge because it’s hard for us to do something with one of those pieces and not the other because of a scale issue. Each side is too big to be spun off and leave the other on its own,” said Rogerson.

“That’s the dilemma we are facing and the challenge but I think there are certainly ample opportunities for us to address that situation,” he added.

The CEO is well-versed in M&A. Before joining Hexion as CEO in 2017, Rogerson was CEO of US-based specialty chemicals company Chemtura, which was sold to Germany-based LANXESS in 2017.

Prior to that, he was CEO of US-based specialty chemicals company Hercules, which was sold to US-based Ashland in 2008. Both deals were transformational.

Interview article by Joseph Chang