By: Frank Esposito
January 28, 2014
Styrenic block copolymer maker Kraton Performance Polymers Inc. is merging with the SBC business of LCY Chemical Corp. to create a materials firm with annual sales of more than $2 billion.
Houston-based Kraton and LCY of Taipei, Taiwan, announced the deal on Jan. 28. The combined firm will remain a public company, with ownership split evenly between shareholders of each company.
The new Kraton will continue to be based in Houston, and Kevin Fogarty will remain the firm’s CEO.
The combination “will present a number of strategic, operating and financial benefits,” Fogarty said in a Jan. 28 conference call. He added that the transaction “will position us for profitable growth in the years to come and will create value for our shareholders.”
LCY ranks as the world’s third-largest SBC maker based on volume, and had SBC sales of $612 million in the year ended Sept. 30. A recent 220 million-pound capacity expansion in Huizhou, China, is expected to increase its SBC sales to $801 million in 2014. In addition to China, LCY also operates SBC plants in Taiwan and in Baytown, Texas, near Houston.
SBC is the largest of LCY’s seven units. The firm also makes polypropylene resin and a range of chemical products.
In a news release, LCY Chairman and CEO Bowei Lee said that the deal with Kraton “addresses the strategic objectives for both LCY and Kraton and allows the combined company to develop and manufacture more innovative products.”
Lee founded LCY in 1965. The firm opened its first production plant — making formaldehyde and urea formaldehyde resin — in 1967. It opened numerous other chemical plants before buying the Baytown SBC plant — which has annual production capacity of almost 300 million pounds — from Polimeri Europa in 2003. The Huizhou SBC plant opened in 2008.
Kraton has faced financial challenges recently, losing $5.5 million in the first nine months of 2013 as sales fell 11 percent to just over $1 billion. The firm had shown a $13.3 million profit in the same period in 2012. Officials said Kraton’s third-quarter performance was impacted by a maintenance turnaround at its plant in Belpre, Ohio. Kraton’s other global SBC plants are in Japan, Germany, France and Brazil.
Kraton also has been affected by wild swings in price for butadiene feedstock in recent years, which has affected both financial projections and results.
On Wall Street, news of the merger sent Kraton’s per-share stock price up almost 15 percent to $24.50 in early trading Jan. 28. It was at $24.80 in late trading Jan. 29.
Market analysts Robert Eller and Roger Young — both with Robert Eller Associates in Akron, Ohio — said the Kraton/LCY deal should be beneficial to both firms.
“Kraton is trying to leverage themselves in market segments where they haven’t been able to,” said Young, the firm’s vice president for Asia. “LCY is a very good fit. They give Kraton a very strong position in Asia. Kraton is getting a low-cost capacity base and manufacturing structure.”
Eller, the firm’s president, added that the deal “is part of the globalization of the [SBC] industry.”
“It’s representative of a new kind of global joint venture,” he said. “Kraton was somewhat late getting into Asia, so this [deal] is going to help. But one of the questions they’ll need to answer is what to do with global [SBC] overcapacity.”
Kraton officials said that they did not expect its SBC JV with Formosa Petrochemical Corp. to be affected by the deal with LCY. Kraton and Formosa are building a plant with annual production capacity of almost 70 million pounds of hydrogenated SBCs in Mailiao, Taiwan.
The Kraton/LCY deal is expected to create annual savings of $65 million by 2017. It’s also expected to add 75-80 cents per share in operating earnings in the first full year of combined operations.