HuntsmanClariant’s expected $400m/year synergies to rise as talks continue – CFO

LONDON (ICIS)–The merger talks between US polyurethanes producer Huntsman and Clariant leave room to generate efficiencies beyond the the $400m/year initially announced once the two teams “sit together”, according to the CFO at the Swiss chemical major.

Patrick Jany, pictured, said that the decision to merge was taken after years of looking at each other’s portfolio transformations. Huntsman is set to finalise its own adjustment within two months with the launch of an initial public offer (IPO) for its pigments and additives business, including titanium dioxide (TiO2) production, to be called Venator Materials.

While some analysts said at the time of the merger announcement the $400m/year in synergies would be costly and take time to realise, Clariant’s CFO went further and said that there was plenty of room for additional savings in procurement – forecast now at $150m out of the $400m – once the merger process gets underway.

“We only touched a few potential synergy packages [in the initial forecast]. Procurement is a clear field where we can bring a lot of synergies: from the top products we buy to the top suppliers we have, we will be able to leverage higher purchasing power,” said Jany.

“For instance, we spoke about certain savings between raw materials and indirect spend which would only represent a small percentage of the total [$150m/year in procurement synergies]. It is not an extremely ambitious target, so once we go into the detail and our teams sit together, I am sure we will be able to find more synergies on that side.

“We haven’t done so yet not to have any conflict with the antitrust authorities.”

The other $250m/year of the total is expected to come from cost-cutting. Clariant CEO Hariolf Kottmann already sent a storm warning to his employees on 23 May when he said the merger would involve job cuts. Neither the CEO at the time nor the CFO this week would put a figure to the job losses, however.

“The remaining $250m comes from the cost side. By taking two companies and putting them into one, we will not need duplication of country or regional organisations in terms of back office jobs like IT, financial procurement or HR [human resources], there is also space for a leverage there,” Jany said.

“We are not building a new Clariant or a new Huntsman, we are building a new company.”

That new company will employ 28,000 workers, according to Clariant. Currently, the Swiss major employs 17,000 and Huntsman 15,000, but 4,000 workers will go after Venator’s spin-off.

Clariant’s first-quarter financial results’ showed increases for sales and earnings, but analysts noted at the time that margins were stalling and placed more conservative valuations on the company’s stock.

Jany, however, said performance was positive in the first quarter and the decision to announce the merger now had more to do with the finalised portfolio transformation at Huntsman – along with Clariant’s own transformation after the integration of SudChemie, acquired in 2011 for $2.8bn – than with any of the two companies’ performance.

“With more clarity on Huntsman portfolio [after Venator IPO], it was the right time to engage in merger talks, which started around four weeks ago. The two companies have achieved parallel powers. In Clariant’s case, we have streamlined our portfolio in the last three years: the divisions Catalysis, Care Chemicals and Natural Resources have high margins and high profitability, and Plastics & Coatings acts as a cash generator,” he said.

“Huntsman’s case is similar. They have streamlined their portfolio into two high-margin divisions like Advanced Materials, which achieved EBITDA [earnings before interest, taxes, depreciation and amortisation] margin of 22%, the specialty business which serves the aerospace and automobile industries and then polyurethane [PU] – also in this division they have been moving downstream a lot and EBIT [earnings before interest and taxes] and profitability are much stronger than the one you find in Covestro or other competitors.”

At the time of the merger announcement, Huntsman CFO Kimo Esplin said the company wanted to increase PU margins to the range of 16-18% within three years, up from those posted in recent quarters at 15-16%.

Jany, who will be the CFO at the new company, said both the antitrust regulatory approvals for the merger and the consent from both companies’ shareholders are extremely likely. According to him, the overlap of business between the two companies is practically non-existent, forecasting no forced divestments in order to merge.

Clariant’s CFO conceded that the firm’s Care Chemicals division, which produces cosmetics and related products and is strong in emerging markets like Brazil or India, has little access to the US market. With Huntsman’s presence in that market, the merger also makes sense for Clariant to make an entrance for its products there.

“Huntsman’s Performance Products is complementary to Care Chemicals, so we’ll be able to take our products downstream in the US, a customer access we have never had. We always said the US was an emerging market [for our Care Chemicals division] because our market share was too small,” he said.

“With the new customer contacts and production facilities we will now have [in the US], it will be a huge advantage to bring our offering to the country.”

However, some analysts have added a caveat to Clariant’s story of becoming a specialty chemicals company. By merging with Huntsman, the company will be taken back to commodity chemicals industries like textile chemicals, for instance, although Jany was not too concerned about that.

He said textile chemicals in the case of Huntsman was “a bit” like Clariant’s own Plastics & Coatings division – after years of losses, the division has revived and its margins currently stand at around 11% of EBITDA, while the company hopes the figure could rise to 15% in coming years,

Switzerland’s unique and business-friendly tax base make it the country where the new company wants to keep, at least, its headquarters. Jany even said the company will even be more Swiss than Clariant has ever been.

“It will actually become a stronger Swiss company: HQ [headquarters] will remain in Switzerland and, in fact, Huntsman has now more employees in the country than Clariant, and we have more employees in the US than Huntsman does. We will remain an international company based in Switzerland.”

Interview article by Jonathan Lopez