“We can say without reservation that, in investing, spinoffs are the closest thing you can find to a sure thing. It all comes down to the incentives when companies spin off a subsidiary or division and hand out shares to their shareholders. Study after study has shown that after an initial adjustment period of a few months, spinoffs tend to outperform groups of comparable stocks for several years….” Pat McKeough shows how spinoffs and other “special situations” can create windfalls for informed investors.
Huntsman came to our attention after announcing it would spin off its Venator subsidiary. The company’s plans have since changed, and instead of a spinoff, it used an IPO to sell shares in Venator. Huntsman now intends to merge with a Swiss chemical maker. We think the company’s new plans will still unlock considerable value for shareholders.
HUNTSMAN CORP. $27 (New York symbol HUN; Manufacturing & Industry sector; Shares outstanding: 240.0 million; Market cap: $6.5 billion; Takeover Target Rating: Lowest; Dividend yield: 1.9%; TSINetwork Rating: Average; www.huntsman.com) is a leading maker of specialty chemicals. It sells these to makers of adhesives, textiles, construction materials, paints, detergents and automotive products. In, 1974, Huntsman also created the styrofoam clamshell container for McDonald’s Big Mac hamburger.
The company has more than 100 plants and research facilities in 30 countries. In 2016, the U.S. accounted for 31% of its sales, followed by China (11%), Germany (7%), Mexico (5%) and other countries (46%).
Huntsman sales fell from $11.2 billion in 2012 to $11.1 billion in 2013. Sales improved to $11.6 billion in 2014 after it bought Rockwood Holdings for $1.04 billion. Rockwood makes titanium dioxide, a substance used in the production of inks, paints and varnishes. Huntsman’s sales declined to $10.3 billion in 2015, and to $9.7 billion in 2016, due to falling demand for certain chemicals.
Due to costs related to a restructuring plan, including plant closures and job cuts, earnings fell from $1.51 a share (or a total of $365.0 million) in 2012 to $0.53 a share (or $128 million) in 2013. Earnings then jumped to $1.31 a share (or $345 million) in 2014 thanks to the Rockwood acquisition; they then fell to $0.38 a share (or $94 million) in 2015 on more restructuring costs. In 2016, earnings rebounded to $1.38 a share (or $326 million).
In October 2016, Huntsman announced that it would spin off its pigments and additives business (including titanium dioxide) as a U.K.-based firm called Venator Materials PLC. Venator operates 27 facilities in 10 countries.
However, in May 2017, Huntsman agreed to merge with Switzerland-based chemical maker Clariant. That firm makes aircraft de-icing fluids, pesticide ingredients and plastics colouring.
The upcoming merger forced the company to cancel its plans to spin off Venator. That would have required shareholders to pay capital-gains tax on any Venator shares they received. Instead, Huntsman used an initial public offering (IPO) to sell 26.1 million shares in Venator (New York symbol VNTR) for $20 each. The company has also held onto a 78% stake in Venator.
That firm is well-positioned to profit as a separate company. Venator spent $1.3 billion between 2014 and 2016 on the Rockwood purchase, and restructuring measures should reduce overlapping costs. Titanium dixoxide prices are also beginning to rise as demand exceeds current supply. In the first quarter of 2017, the company earned $61 million on a pro-forma basis (before interest and taxes), with revenue of $569 million.
Meanwhile, Huntsman’s merger deal with Clariant will see its shareholders receive 1.2196 shares in the combined firm (called HuntsmanClariant) for each share of Huntsman they hold. As a group, they will own 48% of the new firm. The companies aim to complete the merger before 2018.
Huntsman is up 75% since the Venator spinoff announcement. The merger with Clariant should lift it even higher.
That’s partly because HuntsmanClariant will be based in Switzerland. The move will significantly cut the combined company’s tax bill. HuntsmanClariant should also cut $400 million from its annual costs by the end of the second year.
Huntsman now plans to apply the $475 million in net proceeds from the Venator IPO to its total debt of $4.12 billion. That should let the company further invest in its growth.
Huntsman is a buy. Venator is a buy for aggressive inventors.
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