Celanese, Blackstone to create world’s largest acetate tow company

US-based Celanese will form a joint venture with private equity firm Blackstone Group to combine their acetate tow businesses.

Celanese will own 70% of the business, to be headquartered in Amsterdam, the Netherlands, while Blackstone will hold a 30% stake.

Acetate tow is mainly used to produce cigarette filters, along with other products such as insulation, packaging and nonwovens. Acetic acid is used in the production process.

ASSETS

Celanese will receive an initial dividend of around $1.6bn after the formation of the joint venture, and use the proceeds to pursue growth and acquisition opportunities, as well as reduce debt and purchase some of its own shares.

Blackstone will receive a $600m dividend which it will use to pay down debt from its existing acetate tow business. The joint venture will take on about $2.2bn in new debt provided by Celanese and Blackstone.

The partners did not disclose a potential closing date for the transaction, which is subject to regulatory approvals.

The move follows Blackstone’s acquisition of Belgium-based Solvay’s acetate tow business earlier in June for around €1.0bn.

The joint venture will combine Celanese’s Cellulose Derivatives division and Blackstone’s Rhodia Acetow business, and is expected to generate around $1.3bn in annual pro forma revenues and over $520m in earnings before interest, tax, depreciation and amortisation (EBITDA), according to Celanese.

The combined company will have around 2,400 employees across eight wholly-owned manufacturing facilities and three existing joint venture sites.

With an EBITDA margin of over 40%, the business is certainly high margin. But growth has been challenging.

Under the terms of the agreement, Celanese will contribute its Cellulose Derivatives business unit, including its equity interest in existing JVs with China National Tobacco Corporation (CNTC), and Blackstone will contribute its Rhodia Acetow business unit.

The Celanese/Blackstone deal could set the stage for further consolidation of the acetate filter tow industry.

“The JV transaction gives Celanese a leadership position in merchant tow (both market share and asset quality) and sufficient scale to be able to further restructure the industry to cope with medium-term demand trends,” said Laurence Alexander, analyst at Jefferies.

“Longer term, Celanese may be able to explore exiting tow or diluting its stake below the consolidation threshold, improving EBITDA optics, much as DSM improved its apparent mix by shifting it caprolactam assets into a JV,” he added.

Celanese investors cheered the deal, sending its stock price up 5.6% on 19 June, “partly on the assumption that it will monetise the JV down the line”, said Wells Fargo analyst Frank Mitsch.

“This venture as it grows and expands, could stand on its own, but there’s nothing set in stone in terms of a hard day to do that,” said Celanese CEO Mark Rohr on the company’s conference call on the deal.

“You should imagine that as more and more successful it becomes, the more and more independent it will become and [a full divestiture] could make sense at some future day.”

While the deal is positive, it isn’t necessarily a “slam dunk” given the oligopolistic nature of the filter tow business, Wells Fargo’s Mitsch noted.

“We were heartened to hear Celanese offer that CNTC was in favor of this transaction, but note that the regulatory process will be ‘pretty complicated’,” said Mitsch.

While no timing on completion was given, “12 months might be a reasonable timeframe”, he added.

GLOBAL CAPACITY

The Celanese joint venture with Blackstone would become the world’s largest acetate filter tow company with about 30% of global capacity, ahead of Eastman Chemical’s 24%, according to Wells Fargo.

Global capacity of acetate filter tow stands at around 810,000 tonnes/year with 270,000 tonnes/year, or a third, in China, according to Celanese.

The industry overall has struggled with overcapacity amid declining demand.

“While capacity reduction was not foreshadowed in the commentary, we’d be stunned not to see some level of reduction within a year of completion given the current 80% industry operating rate and forecast demand decline,” said Mitsch.

The acetate filter tow business has seen price declines since 2015, “catalysed by China’s crackdown on cigarette gifting, which led to a significant contraction in supply chain inventories,” noted UBS analyst John Roberts.

China is estimated to account for around 40% of global consumption, he added.

China’s filter tow imports have fallen dramatically since 2011, from 43% of its total demand, to an estimated 15% in 2016, according to Celanese. Imports as a share of demand are expected to fall further to 9% in 2017. It will fall 6% in 2018, according to Celanese.