Nova Chemicals Corp.'s shareholders recently approved a deal by which the Pittsburgh-based maker of polyethylene, polystyrene and chemical feedstocks will be acquired by a Middle Eastern energy firm for about $500 million.
More than 98 percent of Nova shareholders approved the sale to International Petroleum Investment Corp. of Abu Dhabi, United Arab Emirates. A special resolution was needed under the Canada Business Corporations Act.
The deal, announced in early February, works out to an acquisition price of about $6 per share. Nova had been struggling with a heavy debt load and weak results, sending its per-share stock under $20 in September and under $10 in November before it bottomed out at $1.10 on Feb. 3. The price was at $1.34 when the deal was announced.
IPIC officials have said they are not planning major changes to Nova's management team or daily operations. Nova employs 3,300, including 250 at its Pittsburgh headquarters and 350 at an office and two research labs in Calgary, Alberta. It reported annual sales of almost $7.4 billion in 2008.
As previously planned, Chris Pappas replaced Jeff Lipton as Nova's CEO on May 1. Pappas, 53, has been with Nova since 2000, most recently serving as president and chief operating officer. Prior to joining the firm, Pappas was with Dow Chemical Co. for 18 years. Lipton, 66, joined Nova in 1994 after a 28-year career with DuPont Co. He became Nova's president and CEO in 1998.
IPIC officials declined further comment, referring back to statements made at the time the deal was announced. At that time, IPIC board member and Managing Director H. E. Khadem Al Qubaisi said IPIC can offer Nova stability, investment and expansion.
State-owned IPIC, with more than $14 billion in assets, is responsible for energy investments outside of Abu Dhabi. It owns 64 percent of polyolefins maker Borealis AG of Vienna and 20 percent of PP producer Oman Polypropylene LLC of Oman.
Nova's Ineos Nova joint venture ranks as North America's largest PS maker with a market share of 35 percent, based on estimated 2008 sales. Nova also ranks third in the region's linear low density PE market with a 14 percent share. It also is seventh in high density PE (5 percent) and eighth in LDPE (3 percent). Most of its PE capacity is located at a massive 2.4 billion-pound capacity plant in Joffre, Alberta.
Looking back, it is evident that Nova was done in by both short- and long-term forces in the plastics and petrochemicals market. These forces eventually overcame the “Alberta advantage,” the term used to describe Nova's access to lower-priced natural gas feedstocks in western Canada, which often gave the firm a financial edge in its olefins/polyolefins business vs. competitors that source their raw materials from the U.S. Gulf Coast.
“We were facing a combination of liquidity pressures, frozen credit markets and an uncertain economy,” said Greg Wilkinson, the firm's vice president of public and government affairs. “Put those three together and it's a very challenging environment.
“Things were particularly tough in the fourth quarter [of 2008]. We had expected a tough quarter, but it was worse than we expected. IPIC's proposal was the best alternative offered to the board. It was a very clean transaction.”
Nova lost $214 million in the fourth quarter, erasing previous gains and giving it a loss of $48 million for full-year 2008. Fourth-quarter sales fell 36 percent to less than $1.2 billion when compared with the 2007 quarter.
“Then, in January, credit markets were tighter than they had ever been, and we had a $250 million bond payment due at the end of March” Wilkinson said. “We were facing liquidity pressures as a stand-alone entity, and IPIC came in with their offer.”
The seeds of the deal were planted in 2008 when Nova officials talked with Borealis about potential joint ventures, according to Wilkinson. Those meetings eventually led to a relationship between Nova and IPIC.
Taking a longer view, Nova never was able to benefit from and incorporate its 1998 acquisition of the polystyrene and styrenics business of Huntsman Corp. The deal looked OK at the time, but higher prices for benzene feedstock and subsequent drops in PS demand sapped all profitability from the business. The downturn led Nova to merge its styrenics business with that of Ineos Group in 2007 to form Ineos Nova.
“Styrenics has been painfully difficult for everyone involved for a long time,” Wilkinson said. “But the business still has very strong assets with great technology.”
As of April 1, a clause in the Ineos Nova agreement allows either side to buy out the other's 50 percent share. But since Ineos is struggling financially as well, such a buyout seems unlikely.
The gap between Nova's fairly successful olefins/polyolefins unit and its struggling styrenics and performance styrenics units is clear. The styrenics businesses had combined operating loss of almost $400 million from 2006-08, while olefins/polyolefins generated operating income of $1.8 billion.
Industry consultant Robert Eller now sees Nova as part of an international network of petrochemical firms associated with IPIC. In addition to Borealis, that list includes Chemaweyaat, an Abu Dhabi plastics and chemical maker set to begin production in 2014, and its PP and PC making arm, Tacaamol; as well as Borouge, a polyolefins joint venture between Borealis and Abu Dhabi National Oil Co.
“Borealis has an excellent position in the European market and will be in China and the Asia Pacific through Borouge,” said Eller, president of Robert Eller Associates LLC in Akron, Ohio. “What's missing is a position in North America, and that's what they get with Nova. Some petro-dollars are now flowing into North America.”
Eller added that IPIC might add PP production to Nova's North American sites, since other IPIC-owned firms make that material at other sites around the world. Entering North America also would give Borealis a “back door” into the Asian automotive market through work North American automakers are doing there.
Moving forward, Nova now only needs regulatory approval from several countries where it operates for the IPIC deal to become final but it doesn't expect challenges. All approvals should be in by year's end, Wilkinson said.
From that point, it will be a new world for Nova, as it moves from publicly held to private firm.
“This is a good place to be in for all of our shareholders,” Wilkinson said. “We can get on with developing new products and taking them to market and not be distracted by uncertainty.”
Longtime customers have offered support, he added. “They're pleased that we've found financial stability and an owner who's interested in growth and is a long-term investor,” he said.