DuPont: Huntsman's TiO2 IPO Plan Illustrates Option For DuPont Performance Chemicals

| About: Huntsman Corporation (HUN)

Huntsman Corporation's (NYSE:HUN) purchase of Rockwood Holding's (NYSE:ROC) Performance Additives and Titanium Dioxide business should bring renewed attention to DuPont's (NYSE:DD) plan to transform its business from a highly cyclical chemical company to a higher multiple, less cyclical food and agriculture company. The Huntsman acquisition should refocus investors on DuPont's evaluation of strategic alternatives for its Performance Coatings Business with the possibility of an IPO or spinoff getting renewed attention. Additionally, Huntsman's bullish outlook for the business and detailed explanation of earnings growth drivers should provide investors more confidence in DuPont's ability to return segment margins to historical mid-cycle levels.

Huntsman/Rockwood Transaction Details

Huntsman announced the purchase of Rockwood's Performance Additives and Titanium Dioxide (Ti02) business for $1.1bn in cash plus the assumption of $225mm in unfunded pension liabilities. Huntsman, in its press release, announced that it expects 2014 adjusted EBITDA to be $200mm compared to $105mm on a TTM basis. Including the $225mm pension obligation Huntsman is assuming, Huntsman is acquiring the business for 6.7x estimated FY14 EBITDA (excluding synergies) and 12.6x trailing EBITDA.

Huntsman expects the deal to close in 1H14 and believes they can realize $130mm in cost savings for the combined business (8.4% of target TTM sales) by 2015. Huntsman expects the deal to be immediately accretive and as much as $0.60 accretive including the full impact of cost savings. In conjunction with the deal, Huntsman announced they plan to IPO the combined business within 2 years of deal close as a $3.5bn in sales and $500mm in adjusted EBITDA pigment company.

Implications for DuPont

Huntsman outlined a number of reasons they expect adjusted EBITDA to nearly double in FY14, most of which also apply to DuPont. Huntsman specifically called out a recovery in sales volumes, improving capacity utilization, better fixed cost absorption, an end to destocking in channel inventories, lower raw materials costs and some pricing as contributors to adjusted EBITDA growth. On its most recent conference call, DuPont pointed to many of the same factors as reasons for Performance Chemical margins to approach normalized levels of 18% - 20% (from 15% currently) in the future.

Huntsman's plan to IPO its pigment business (pro forma the second biggest Ti02 business) within 2 years of the closing of the transaction with Rockwood should bring renewed attention to the future of DuPont's Performance Chemicals business (the biggest Ti02 business). In conjunction with their most recent earnings release, DuPont announced they were seeking strategic alternatives for their performance chemicals business.

The idea of an IPO could be especially appealing to DuPont since the size of the Performance Chemicals business (>$10bn enterprise value at the Huntsman/Rockwood forward multiple) limits the universe of potential buyers. DuPont's Performance Chemicals business is already ahead of where Huntsman believes its pigments business will be at IPO. Huntsman is targeting $3.5bn in sales and $500mm in adjusted EBITDA (<15% operating margins) by IPO while DuPont's Performance Chemicals business is twice as large on a revenue basis, earns more than three times as much and is targeting 18-20% margins in the future. This superior size and margin structure should position DuPont for an easier and quicker exit from the business than Huntsman which must execute on margin growth plans prior to an IPO.

Disclosure: I am long DD. 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.