Evonik’s stock jumps on methacrylates ‘impressive’ €3bn proceeds

LONDON (ICIS)–Evonik’s stock shot up in Tuesday’s morning trading after the company announced US private equity fund Advent is to pay €3bn for its methacrylates business as well as higher-than-expected proceeds, according to equity chemicals analysts.

Germany-headquartered Evonik’s shares were trading up 4.66% by 11:00 London time, despite negative fourth-quarter results on the back of weakness at performance materials and logistical costs associated to low water levels on the River Rhine during 2018.

However, most analysts expected Evonik to achieve proceeds between €2.0-2.5bn for its methacrylates business, which includes methyl methacrylate (MMA) and its downstream product polymethyl methacrylate (PMMA.

Together with MMA and PMMA, the divested assets also include Evonik’s Acrylic Products and CyPlus – which produces cyanides – segments, as well as some methacrylate resins activities.

The transaction is expected to close in the third quarter.

Evonik is a key methacrylates player, with 18 production sites and 3,900 employees worldwide. The business generated an average annual earnings before interest, taxes, depreciation and amortisation (EBITDA) of about €350m and sales of around €1.8bn/year during the period 2016-2018.

Chemicals equity analysts at London-based Bernstein Research said that the price tag achieved by Evonik, which represents around 10 times (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.

“Note that the 10x exit multiple is calculated on a through-cycle EBITDA from 2015-18, compared to the official press release only averaging over 2016-18 (€350mn, 8.5x), and 2019 consensus EBITDA of €279mn (10.8x).”

With the divestment, Evonik will get the cash firepower necessary to undertake acquisitions which would place the firm into the realm of a purely specialty chemicals producer, which achieve higher margins than more commoditised businesses, according to US credit rating agency Moody’s on Tuesday.

Moreover, the deal with Advent also includes €500m in pension liabilities, a factor viewed favourably by analysts as the German firm has been trying to lower costs related to employees’ pension schemes.

“The focus today [Tuesday] will be in the strong 2019 FCF [free cash flow] guidance (at least 6% FCF yield), the significant improvement in Evonik’s pension liabilities (which were always a struggle) and the better-than-expected proceeds from the divestments of the methacrylate’s business,” said analysts at Germany’s Baader Bank.

“We see restructuring measures starting to materialise and the portfolio streamlining unveiling the strength of Evonik’s portfolio in the next years.”

Evonik is in the process of acquiring PeroxyChem for $625m, a US-headquartered producer of hydrogen peroxide (H2O2) and peracetic acid (PAA), oxidants used as bleaching agents in the pulp industry, as disinfectant for food processing or for wastewater treatment, among others.

Going forward, Evonik issued what Bernstein called a “suitably conservative” outlook.

“Evonik has a recent history of guiding at the low end initially and upping guidance later. In 2018, this turned out to be prudent given the unexpected Rhine water levels and macro deterioration into year-end,” said the analysts.

“For 2019, the company guides for slightly lower-to-stable EBITDA – although this includes an expected €140mn impact from lower methacrylates earnings, which will be restated with 1Q19 [first quarter 2019], and no contribution from Peroxychem.”

Even so, a flat EBITDA year on year in 2019 would still represent a 4% upside to current 2019 consensus expectations, concluded Bernstein.

Pictured: Evonik’s headquarters in Essen, Germany
Source: Westend61/REX/Shutterstock