NEW YORK--Activist shareholders and managers in the US chemicals space have sharpened their focus on core activities, breaking up and repurchasing shares to boost shareholder value, according to Fitch Ratings.
This has become a challenge for high-yield commodity chemical producers where scale and integration are required to drive costs down and margins up. High-yield chemical companies Rockwood Specialty Chemicals, W.R. Grace and Ashland Inc. have all pursued break-ups to improve shareholder value.
Axiall has been looking to divest its building products division at a favorable valuation to redeploy cash to improve its core business. Axiall's chlor-alkali assets are viewed as low cost but it has been difficult to realize shareholder value from this advantage. Fitch believes the company's options for improving shareholder returns look to be limited.
In May 2015, Franklin Resources, Inc., a 6% Axiall Corp. shareholder at that time, offered its opinion that the board of directors should undertake a more substantial strategic review encompassing the potential sale of all or parts of the issuer, its capital allocation plans, cost structure and the possible replacement of senior management. Shortly thereafter, the company made changes in management, initiated a cost-reduction program and decided to sell its building products subsidiary. In January 2016, Axiall rejected a $2.9 billion takeover offer from Westlake Chemical Corp. and rejected the revised offer of $3.1 billion on April 4 as too low; the company now faces a proxy battle.
Axiall's results have been challenged by oversupply in the chlor-alkali markets, tightness in the Louisiana ethylene market and lackluster polyvinyl chloride (PVC) demand. Additionally, its high-yield capital structure limits its ability to make transformational acquisitions or repurchase shares.
Axiall's strategy had been integration; forward into building products with the acquisition of Royal Group in 2006 and Exterior Portfolio by Crane in 2011 and backward into chlor-alkali with the PPG Eagle Spinco merger in 2013. Axiall is the largest domestic customer for merchant ethylene and entered into a preliminary agreement with Lotte Chemical in early 2014 to partner on a new 2 billion lb. per annum ethylene production facility in Louisiana that could eventually provide Axial with producer economics on 50% of its ethylene requirements. In 2015, the company divested its phosgene business and its aromatics business.
The chlor-alkali market should benefit from capacity closures by Olin Corporation (433,000 tons announced March 21) and the requirement to shut 2.8 million tons of mercury cell production in Europe by year-end 2017, as well as limited additional capacity through 2020. The PVC market is closely tied to construction, with China accounting for about one-half of demand, and 80% of demand when taken together with other emerging markets. The slowdown in China is expected to result in that country becoming a net exporter over the following year or so, which will challenge producers in North America as they export roughly 40% of production, in aggregate.
For Axiall to compete effectively, costs need to decline and it requires a dependable, low-cost source of ethylene. The Lotte transaction looks to provide Axiall with producer economics to the extent of its ownership, which starts at 10%, beginning in 2019 or so. Axiall has the option to increase its ownership to 50%, which would give it producer economics on 50% of its requirements. Beginning in 2017, Westlake looks to have some excess ethylene capacity, and Eastman Chemicals has been looking to monetize about 0.7 billion lbs. per year of excess ethylene capacity in Longview, TX.
Fitch believes Westlake has sufficient cash and borrowing capacity to acquire Axiall on the revised terms and views the transaction as neutral to the ratings.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.