SABIC and Clariant tighten partnership by combining portfolios in high performan

Switzerland-headquartered speciality chemicals company, Clariant, and Saudi Arabia’s petrochemical giant, SABIC, have tightened their partnership, by agreeing to pool their specialities business into a new Business Area (BA) to be called High Performance Materials (HPM). This will include some parts of SABIC’s advanced engineering plastics, and all of Clariant’s polymer additives and high value masterbatches businesses now part of the BA Plastics and Coatings. At the same time, Clariant has also announced the divestment by 2020 of its remaining Plastics and Coatings business, which includes the pigments, standard masterbatches and medical specialities. The rest of the BAs at Clariant – Care Chemicals, Catalysis and Natural Resources – are to stay unchanged.

For SABIC, the deal, which follows an announcement a few weeks earlier of the completion of its arrangement to pick a 24.99% stake in Clariant, represents a value-addition strategy that it is keen to pursue. For Clariant, which has been under pressure from activist shareholders to restructure, it represents an opportunity to exit low margin businesses and transition to businesses with more attractive growth prospects and above average value potential.

Last October, Clariant and America’s Huntsman abandoned plans for a $20-bn merger – a move that represented a major win for activist investors who fought the deal for months on the grounds it would destroy shareholder value.

Integrated offerings for plastics markets

As per the deal announced on September 18 in Muttenz (Switzerland), the new BA HPM, will include from Clariant’s side the Additives business that supplies high performance products mainly for the plastics markets, as well as high value masterbatches comprising colour, high temperature resins and healthcare. The black, white and the medical masterbatches business, will, however, be jettisoned in the near future, presumably because they do not meet (and unlikely to) the hurdle rate of return Clariant has set for itself.

SABIC’s Innovative Plastics business employs more than 9,500 persons in more than 25 countries. It manufactures thermoplastic resins, coatings, specialty compounds, film, and sheet around the world, with its six primary sites located in Bergen op Zoom, Netherlands; Cartegena, Spain; Burkville (AL, USA); Mount Vernon (IN, USA); Ottawa (IL, USA), and Selkirk (NY, USA).

The petrochemical giant will pitch in with its array of high performance thermoplastics – polyphenyl ether (PPE) and polyetherimde (PEI) resins, which came within SABIC’s fold with the acquisition of General Electric’s engineering plastics business in 2007. Also included is the LNP range of compounds and copolymers that SABIC purchased way back in 2001 from LNP Engineering Plastics. These custom compounds enable offering of tailored solutions to specific customer demands.

The expanded HPM business will offer a range of customer-specific, application knowhow driven and competitively advantaged product range of high-performance thermoplastics for demanding thermo-electro-optical and mechanical environments, speciality additives and masterbatches, in tandem with a global compounding platform. Major applications include smart electronics, healthcare, aerospace, automotive, robotics, additive manufacturing, renewable energy and e-mobility – all of which demand fulfilment of stringent customer specifications, and require exclusive technology and formulation knowhow.

Equal holding

Clariant is to hold a majority stake in HPM and the Memorandum of Understanding between the two includes an agreement in principle to transfer the businesses at similar valuation multiples due the premise that they are of similar quality and profitability levels. There will, however, be an equalization consideration to be made by Clariant to SABIC, depending on final relative valuation to be determined by both parties. Clariant has asserted that this payout should not lead to any substantial increase in its net debt for 2019 and not change the investment grade rating it now enjoys.

In coming months both companies will execute the carve-out of their respective businesses, conduct reciprocal due diligence and continue negotiating the transaction with the target to sign a definitive agreement by the end of the first half of next year. Completion of the transaction is expected to take place by the end of 2019, effective as of January 1, 2020, subject to regulatory clearances.

By 2021, sales of HPM are expected to grow to CHF 4-bn, from pro-forma sales of CHF 3-bn in 2017 and EBITDA margin, including synergies, is expected to rise to 24-25% from 19.4% in pro-forma 2017. The synergies from the combination are expected to be substantial at about CHF 100-mn, realised over three years from closing. Implementation costs are expected to be in the range of CHF 80-mn over the same time period.

Higher growth targets and margins

Clariant has also announced new targets for 2021 in each of the other three BAs untouched by the current developments.

The BA Care Chemicals, for one, expects to continue to grow at a more accelerated pace, by offering differentiated, high performance and sustainable solutions, to meet increasing demand for convenience, renewable and natural products. The main driver here is expected to be the Consumer Care business, comprising Personal Care, Home Care, Crop Solutions and Health Care. As per its updated outlook, this BA is expected to clock sales growth of 5-7% annually between 2017 and 2021, while EBITDA is seen improving from 16.5% in 2017 to 19-21% by 2021.

In the BA Catalysis (created with the acquisition of Sud-Chemie in 2011), Clariant expects to continue to target above market growth rates by capitalising on its innovation leadership and strong licensing partnerships. The Business Line Biofuels and Derivatives is expected to contribute strongly, with revenues of CHF 100-mn from the licensing of its innovative sunliquid technology for making cellulosic ethanol and sales of bio-ethanol from the first production plant now being built in Romania. The 50,000-tpa cellulosic ethanol plant saw ground-breaking only about a couple of weeks ago, and its entire production has been contracted for sales for several years starting from 2021. At the heart of the sunliquid process is a viable, low-cost fermentation technology, using proprietary enzymes that can break down C5 and C6 sugars in biomass into ethanol at yields and conversions that make for a commercially attractive offering. Clariant plans to license this technology to third party investors, and the Romania project represents a major milestone in what has been a challenging effort for several other companies as well. Clariant sees this BA clocking sales growth of 6-9% between 2017 and 2021 with EBITDA improving slightly from 25% in 2017 to the range of 26-30% in 2021.

The BA Natural Resources, including the Oil & Mining Services activities, are expected to benefit from the recovery in oil markets. Profitability improvement here is expected to come from tight cost control, which should see EBITDA margins improve from 14.3% in 2017 to 16-17% by 2021, even as sales expands by 6-7% annually.

Ready for the future?

Clariant’s management has stated that the revamp is the first move in the direction of attaining critical mass, which it deems important to stay competitive. While it has not ruled out further mergers, it has clarified that there are, as of now, no plans to spin-off the HPM business.

SABIC, on its part, has reiterated that it is not interested in a full takeover of Clariant, but how long it will be content on just being the largest shareholder remains to be seen.

With the moves expected to raise sales from CHF 6.4-bn in 2017 to CHF 9-bn by 2021, and EBITDA from 12.7% to 20%, Clariant seems, at least for now, on course to deliver better value and returns to stakeholders. But, most likely, this is not the last word on an alliance between two companies that could not be more dissimilar!