Huntsman: Time To Go Hunting

Sep.17.13 | About: Huntsman Corporation (HUN)

Shares of Huntsman (NYSE:HUN) jumped in Tuesday's trading session after the chemical manufacturer announced the acquisition of Rockwood's Performance Additives and Titanium Dioxide business.

The multiples look really attractive, especially when considering the large synergies to be achieved. As Huntsman already laid out an exit plan for the business, it has created a perfect roadmap to create value for its shareholders in the coming three years.

Shares offer long-term appeal, as I see potential for shares to double, if the company can execute according to plan and IPO its pigment business at a good price.

The Deal

Huntsman announced that it has entered into a definitive agreement under which it will acquire Rockwood's (NYSE:ROC) Performance Additives and Titanium Dioxide business.

Huntsman will pay some $1.1 billion in cash, and furthermore assume $225 million in unfunded pension liabilities following the deal.

Rockwood's Performance Additives business includes the manufacturing of sulphate process, synthetic iron-oxide, timber treatment products and specialty automotive materials, among others.

The business supplies a wide range of industries including the construction, coatings, plastics, paper, food and pharmaceutical industry, among others.

The deal is expected to be immediately accretive to Huntsman's earnings per share. The company sees $0.60 per share accretion in 2014, reflecting the full impact of an impressive $130 million in expected cost savings.

The $1.1 billion price tag values the business at 5.5 times expected adjusted EBITDA of $200 million for 2014, or just 3.3 times EBITDA when factoring in $130 million in expected synergies.

Yet Huntsman has big plans with the business. Once combined with the pigment business of Huntsman, the company plans to sell the combined Pigment business through an IPO within 2 years after the deal closure.

Huntsman has committed financing in place. The deal is subject to regulatory approval and normal closing conditions, expected to close in the first half of 2014.


Huntsman ended its second quarter with $181 million in cash and equivalents. The company operates with $3.77 billion in total debt, for a net debt position of around $3.6 billion.

Revenues for the first six months of the year fell by 5.0% to $5.53 billion. Net income decimated on restructuring and impairment charges, as well as losses on extinguishment of debt. As a result, net income fell by 92% to $23 million. Adjusted earnings fell by 58% to $140 million amidst difficult market circumstance.

Factoring in gains of 4%, with shares exchanging hands at $20 per share, the market values Huntsman at $4.8 billion.

Huntsman pays a quarterly dividend of $0.12 per share, for an annual dividend yield of 2.5%.

Some Historical Perspective

Investors in Huntsman have seen a lot of volatility over the long term, yet they have not seen sustainable returns after shares were sold to the public in an initial public offering priced at $23 in 2005.

Shares traded in a $20-$30 trading range between 2005 and 2008, falling to lows of $3 in 2009 amidst the financial crisis. Shares have steadily regained lost ground. After witnessing year to date returns of 30%, they are trading at $20 per share again.

Between the calendar year of 2009 and 2012, Huntsman has increased its annual revenues by a cumulative 46% to $11.2 billion. Net earnings have grown to $361 million over the past year.

Investment Thesis

While the deal is not that big, it is quite substantial for Huntsman, driven by the $130 million in expected synergies which alone could almost justify the $1.35 billion deal tag.

The deal will create the world's second largest producer of titanium dioxide and inorganic color pigments, behind DuPont, used for paints and industrial coatings. Adding Rockwell's 3,300 workers to Huntsman's existing assets will create a pigment business with $3.4 billion in annual revenues and $530 million in adjusted EBITDA, according to Huntsman's presentation.

Wile Huntsman will grow to a $12.4 billion business following the deal, with $1.42 billion in adjusted EBITDA, Huntsman has already indicated it wants to IPO the pigment business in the future.

As such the business will shrink from $10.9 billion in revenues at the moment to $9.0 billion following the public offering. Adjusted EBITDA will fall from $1.18 billion to $1.05 billion.

The deal makes excellent sense to me. While the current net debt position will increase from $3.6 billion toward $5.0 billion following the deal, Huntsman has the opportunity to create a world-class pigment business. If the company can sell the business at 7-10 times EBITDA in two or three year's time, the proceeds of anywhere between $3.5 and $5.5 billion, should be almost sufficient to eliminate the entire net debt position.

With no debt outstanding, the remaining $9.0 billion business with EBITDA of just over a billion, would be valued at the current market capitalization of roughly $4.8 billion. This values operations at merely 0.5 times annual revenues and 4.5 times EBITDA, leaving plenty of upside to the current share price if all goes to plan.

For now the deal could add to earnings by some $0.60 per share, justifying a big run-up in the share price. If the company executes well, and the public offering fetches a decent price in two year's time, I see the potential for shares to almost double in three year's time.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.