Eastman Chemical Co. is gambling that two heads are better than one, announcing plans to split itself into separate, publicly traded companies by the end of 2001.
One of the companies will include Eastman's PET business, the world's largest, as well as its polyethylene and acetate fibers units. The second company will include specialty plastics and chemicals.
In a Feb. 6 conference call, Eastman Chairman and Chief Executive Officer Earnest Deavenport Jr. described the proposed split as "the logical response to the challenge of trying to run two different types of companies in the same company."
"These really are different businesses — one commodity, one specialty — and they're clearly in need of different structures and strategies," Deavenport said, adding that the move will help the financial community by giving them "a very clear investment decision."
Deavenport will retire when the spinoff is completed.
The PET/PE/acetate fibers half of the split will have annual sales of more than $2 billion, with more than half of that from PET. The company will be headed by Allan Rothwell as chief executive officer. Rothwell has been president of Eastman's Chemicals Group.
The specialty plastics and chemicals half will have annual sales of more than $3 billion, and will be headed by CEO J. Brian Ferguson, who has been president of the Polymers Group.
Rothwell said he is looking forward to the challenge of steering the PET business.
"We're the world's largest player, playing the best hand in a tough and growing market," he said.
Rothwell added that he plans to stick with Eastman's strategy of meeting demand growth by debottlenecking existing PET plants rather than building new ones.
The move could be a reaction to Eastman management's inability to sell off its PET business, according to Edgar Acosta, an industry consultant with DeWitt & Co. Inc. in Houston.
"If you split a company like this, you're looking to sell," Acosta said. "And that could be bad news for other PET makers. Eastman's been a pretty reasonable leader in the industry as far as competition and pricing, but if someone else gets in there, that could change."
If the PET half of the split continues as an independent, commodities-focused company, it could have easier access to funding for capital improvements, since it no longer would have to compete with Eastman's specialties businesses, Acosta added.
Separating commodities like PET and PE from specialties will allow the commodities group to build a business with lower overhead, said consultant Chase Willett of Houston's Chemical Market Associates Inc.
"[Eastman officials] have a tremendous amount of work ahead of them as far as dividing assets, personnel and technology, but [the split] will allow the PET business to have a little more control of its own destiny," Willett added.
The proposed breakup came as a bit of a surprise to Richard O'Reilly, a stock analyst who covers Eastman for Standard & Poor's in New York.
"[Eastman officials] had talked for years about doing something with the PET business, but I thought they'd sell it before they'd spin it off," O'Reilly said.
Eastman had struggled to maintain growth after the white-hot PET boom of the early to mid-1990s faded. They tried to keep things going with a series of specialties-related acquisitions but did not see the same level of success, according to O'Reilly.
"[Eastman] was still seeing double-digit growth, but it wasn't what it once was," he said. "PET fell into cyclicality, and that was what hurt them."
Eastman officials were unsure how the firm's 15,000 worldwide employees will be split between the two new companies.
The companies will be launched through a spinoff in the form of a tax-free stock dividend, to be effective by the end of the year.
Kingsport, Tenn.-based Eastman was itself spun off from photo giant Eastman Kodak Co. in 1994. The firm posted record sales of $5.3 billion in 2000, a 15 percent jump over 1999.
PET price increases allowed sales at Eastman's container plastics business to jump 26 percent in 2000 even though its volumes were flat. But Eastman and other PET makers have struggled with up-and-down cycles of profitability since overcapacity caused PET prices to crash in 1996.
Eastman produces about 3.1 billion pounds of PET globally each year. In North America, the firm controls about one-third of the region's PET market. The firm's PE production totals almost 1.1 billion pounds of low and linear low density PE.