Market Outlook: Volume growth is key to AkzoNobel specialties

Netherlands-based AkzoNobel can drive growth in its specialty chemicals businesses by increasing production capacities across the diversified portfolio, executives said at an investor event. The company has identified additional capital spending of about €100m/year that can deliver €500m in additional revenue and €200m in earnings before interest, tax, depreciation and amortisation (EBITDA) within four years, according to management.

“These are very concrete market pull [investments],” said the executive board member responsible for specialty chemicals, Thierry Vanlancker.

They could include additional colloidal silica capacity, further polymer chemicals investment in Asia and, over the next three years, investment in chlorate and chlorine expansions in Europe.

“The market demand is there,” said Vanlancker, responding to questions from financial investors at a critical investor day meeting for AkzoNobel, which is an acquisition target for US paints maker PPG Industries. AkzoNobel said on 19 April it intended to separate its specialty chemicals businesses from the core of the company within 12months and would return the “vast majority” of net proceeds to shareholders. And driving volume growth in the specialty chemicals business is central to AkzoNobel’s strategy to create greater shareholder value from the spinoff as opposed to being acquired by PPG as some major shareholders prefer. AkzoNobel’s senior management has said it will consider the latest PPG proposal. “Growth is an integral part of the [specialtychemicals separation] plan,” said CEOT on Buchner. “We have true confidence in delivering [on that growth],” he added.

DEMAND FOR NEW VOLUMES

In many cases, customers are enquiring about new volumes, AkzoNobel said. The plan is to grow not just volumes but to tackle costs and drive margins higher, its executives added.

Buchner said there have been positive signs from various markets in recent monthsabout volume growth in contrast to earlier,largely oil-price driven uncertainty.

Many of these markets were anticipating a down turn or were lacklustre in the way they were moving but AkzoNobel is now seeing a“clear set of positive signs”, he added.

AkzoNobel reiterated its belief that it will unlock the value of the company itself and not be swayed by unsolicited offers from its US counterpart PPG. CEO Buchner also stated that a potential EGM, which was requested by a few shareholders, would be forth coming in the near future.

It is said that Elliott Holdings, a UK-based hedge fund, had called for the EGM to remove chairman of AkzoNobel’s supervisory board Antony Burgmans.

“We and the other AkzoNobel board members unanimously and strongly support MrBurgmans,” said Buchner alongside chief financial officer Maelys Castella.

OPTIONS ON SEPARATION

AkzoNobel confirmed it is aiming to separateits specialty chemicals business in the next12 months.

However, it ruled out the option of sellingoff its specialty chemicals business inseveral pieces.

The company is pursuing a dual-track process for the exit of the business, with a salebeing considered alongside a separation andinitial public offering (IPO).

While the company is pursuing options fora sale, the business would be sold off as a unitrather than in pieces, according to Castella.

“We have been preparing this option [toseparate specialty chemicals] for a while –what we have done is pull forward the decision,”said Castella.

She estimated that the business could beworth €8bn-12bn, based on an EBITDA multipleof 8-12x, with the vast majority of proceedsto be returned to shareholders.

The company said that €1.6bn will be returnedto shareholders for 2017 via a €1bnspecial dividend combined with a 50% increaseto the regular dividend. A €1bn specialdividend will also be paid this November,AkzoNobel added.

The process is intended to illustrate toshareholders that AkzoNobel can providecompelling additional growth and returnswithout being acquired by PPG.

“We have today been able to present theplan that we have been developing over a periodof time,” said Buchner, speaking at theinvestor day. “This plan in our eyes createssuperior value [to a PPG merger] and is executablealong a clear timeline.”

AkzoNobel expects €50m in additionalcost savings related to the separation of specialtychemicals as well as €150m in annualsavings resulting from ongoing continuousimprovement programmes at the paints andcoatings business.

“Our ongoing commitment to investaround €1bn in research and developmentby 2020 will create innovative products andservices, as well as making a positive contributionto the communities in which we operate,”said Buchner

Analysts at Alliance Bernstein, which hasbeen a vocal advocate for AkzoNobel to entertalks with PPG, said the company’s new financialtargets to 2020, which it estimatedwould translate into a valuation of €85-93/share represent “a big stretch”.