Huntsman buying Rockwood's pigments unit for $1.1 billion, plans IPO

Tue Sep 17, 2013 2:24pm EDT

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(Reuters) - Huntsman Corp (HUN.N) is buying Rockwood Holdings Inc's (ROC.N) titanium dioxide pigments business for $1.1 billion cash, a deal that could mark the start of a long-expected shake-up in the volatile industry.

The buyout, which is expected to close by June of next year, will make Huntsman second only to DuPont (DD.N) atop the market for titanium dioxide, a key white pigment used in paint, sunscreen and myriad other consumer goods.

Huntsman plans to spin off roughly 20 percent of the combined pigments business in an initial public offering within two years of closing the deal. Huntsman would retain a majority stake in the new pigments business, Chief Executive Peter Huntsman said in an interview.

The IPO would give investors the option to invest directly in either a Ti02 producer or the legacy Huntsman Corp, which will have about $11 billion in annual sales after the offering and largely be a polyurethane foam producer.

Huntsman's shares have "been disproportionately weighted to Ti02," Peter Huntsman said.

"This will be an opportunity for us to have investors that want to invest in pigments," he said.

Pigments prices, which are closely tied to the economy, have started to rebound after five years of weak global demand and capacity increases that crimped pricing power.

Producers have been trying to restructure their titanium dioxide businesses to shield themselves from swings in prices for the pigment used to whiten everything from sunscreen to toothpaste.

DuPont (DD.N) has said it is looking for a buyer for its pigments business while Tronox Ltd (TROX.N) is weighing whether to build up the business.

Huntsman said it is not interested in the DuPont assets.

"I would be shocked if a Ti02 producer today would be able to buy or merge with (the titanium dioxide business of) DuPont given their size in the industry," Peter Huntsman said. "With DuPont we probably would have antitrust issues."

Huntsman expects demand for titanium dioxide to continue to recover in coming quarters, partly due to a recovery in the housing and automobile industries in North America.

After the deal, the Americas region is expected to account for more than a fifth of Huntsman's annual pigments sales, while Europe could account for about half, the company said.

The titanium dioxide industry will sell about 5.3 million metric tons of product this year, as much as was sold in 2007, Peter Huntsman said.

"I believe that we're kind of back to normal but no doubt it's been quite a volatile five-year period here," he said.

The deal, announced on Tuesday, is expected to boost Huntsman's annual profit by 60 cents per share. The company reported earnings per share of $1.51 for 2012.

The deal will also make Huntsman the largest processor of sulfate ores, a relatively cheap ingredient used in making pigments, giving it an edge over companies using chlorides.

"With this deal, we're going to expand horizontally rather than vertically," Peter Huntsman said.

Analysts and bankers have said private equity firms could be interested in DuPont's pigments business, which might be too big for companies like Huntsman and Tronox to take over.

"If there's another deal or two announced over the next 12 to 18 months in the titanium dioxide industry, it would not surprise me," KeyBanc Capital Markets analyst Ivan Marcuse said.

EXPANDING CAPACITY

Huntsman said the deal would give it 16 percent of global titanium dioxide capacity, up from 10 percent.

Huntsman will also buy Rockwood's businesses that make color pigments, and chemicals for timber and water treatment and rubber compounding. It will take on $225 million in unfunded pension liabilities as part of the deal.

The combined pigments businesses will generate more than $3.5 billion in sales, and earnings before interest, depreciation and amortization exceeding $500 million.

The deal's value represents a multiple of 5.5 times estimated 2014 adjusted EBITDA of $200 million, Huntsman said.

Anton Ticktin, a partner at boutique investment bank Valence Group, was expecting the businesses to fetch a multiple of 6 to 7 times, considering their specialty elements.

Rockwood, which is narrowing its focus to lithium production as demand for rechargeable batteries in mobile devices grows, recently agreed to sell its industrial ceramics unit for $1.99 billion and clay-based additives business for $635 million.

BofA Merrill Lynch (BAC.N) and Vinson & Elkins advised Huntsman. Lazard acted as Rockwood's financial adviser, while Hughes Hubbard & Reed LLP and Willkie Farr & Gallagher LLP were its legal advisers.

Huntsman shares, which have gained 23 percent this year, rose 4.3 percent to $19.97 afternoon trading. Rockwood shares rose 1.6 percent to $67.69.

(Writing by Sayantani Ghosh in Bangalore; Additional reporting by Ernest Scheyder in New York; Editing by Joyjeet Das and Phil Berlowitz)

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