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Kraton and and LCY expected to renegotiate merger deal

By: Frank Esposito

July 2, 2014

Materials firms Kraton Performance Polymers and LCY Chemical Corp. are expected to renegotiate the terms of a merger that would have given LCY a 50 percent stake in Kraton.

Terms of the deal are expected to change as a result of poor first-half results at the styrenic block copolymers unit of Taipei, Taiwan-based LCY. That business saw first-half pretax profit fall 80 percent to less than $3 million, as a result of lower demand growth and overcapacity for the material, mainly in China.

Kraton President and CEO Kevin Fogarty discussed these results in a presentation on June 24, saying that Kraton’s adjusted pretax profit forecasts for the LCY business could be delayed by up to two years. He added that Kraton — a major SBC maker — expects these factors to ease in the second half of 2014 as China returns to traditional GDP growth rates.

That disclosure, however, sent Houston-based Kraton’s per-share stock price down 14 percent — from more than $25 to less than $22 — by the end of the day. As a result, Kraton’s board of directors announced June 30 that it would withdraw its recommendation that shareholders approve the previously announced agreement. LCY has five business days from that date to respond.

Officials with both firms, however, said they still expect the merger to take place.

“At the end of the day, both parties still want to do the deal,” Kraton investor relations director Gene Shiels said in a July 2 phone interview. “We still want to do the transaction, but the terms probably will change.”

Shiels added that Kraton had not yet filed an amended proxy document that would have set a date for a shareholder vote. The date for that vote now will be dependent on the duration of negotiations between Kraton and LCY.

In the July 2 edition of the Taipei Times newspaper, LCY officials said that they will enter talks with Kraton and will possibly revise terms of the deal. LCY spokeswoman Abby Pan told the Times that her firm would try to learn more about Kraton’s concerns and respond to them in the interest of LCY’s shareholders.

The combined firm is expected to have annual sales of more than $2 billion. SBC is the largest of LCY’s seven units. That business had sales of $612 million in the year ended Sept. 30.

Industry consultant Robert Eller — president of Robert Eller Associates in Akron, Ohio — said that he wasn’t surprised by the challenges facing the Kraton/LCY deal because of SBC overcapacity in Asia.

“The deal is still worth pursuing,” Eller said. “But there are a lot of questions on the table.”