Two opportunities for activist Starboard to boost profits at Huntsman
Monty Rakusen | Image Source | Getty Images
For business: Huntsman Corp.Global manufacturer of organic chemicals products. There are four main segments to the company: Polyurethanes and Performance Products, Advanced Materials, Textile Effects, and Textile Effects. Performance Products produces amines an maleic anhydrides such as ethylene oxide, propylene dioxide, glycols. ethylene dichloride. caustic soda. Ammonia, hydrogen and methylamines are some of the products. The Advanced Materials segment offers epoxy, acrylic, polyurethane, and acrylonitrile-butadiene-based polymer formulations; high performance thermoset resins, curing agents and toughening agents, and carbon nanotubes additives; and base liquid and solid resins. Textile Effects provides dyes and textile chemicals. Its products can be used for a variety of purposes, such as adhesives, aviation, automobile, construction products and durable and non-durable consumers products. Electronics, insulation, medical and packaging. Power generation, refinement, synthetic fiber and textile chemicals are some examples.
Stock market valuePrice: $6.8B (or $30.68 per share).
The percentage of ownership: 8.38%
Average Cost: $26.35
Commentary by an Activist:Starboard, a highly successful activist investor, has vast operational activism experience and helps boards and managers run more efficient companies and improve margins. Their 103rd 13D file. In those 103 filings, they have averaged a return of 33.94% versus 13.26% for the S&P 500. The average hold period for 13D is 18 months.
Starboard bought an 8.38% share for investment.
Huntsman Corp. was established by Jon M. Huntsman. It is now managed by Peter R. Huntsman (chairman of board, president, CEO). The company’s performance has been slow since 2005, when it was IPOed. The company has sold and bought a variety of assets over the years, but it’s stock price, EBITDA, revenue growth, and margins have not changed significantly. Huntsman was significantly outperformed by Eastman Chemical Company and Celanese Corporation, which have both achieved higher margins, and more free cash flow, than its top-of-the-line peers.
Huntsman’s margins on a three-year trailing basis (accounting the cyclicality and the business) are around 14%, while Eastman’s margins range from the low to mid-20s. This results in an 800 basis point margin gap. Although some of this margin gap can be explained by the relative mix of low margin commodity chemicals and high margin specialty chemicals that are more profitable, the majority of it is due to inefficiency and cost problems. Huntsman’s portfolio has changed from being more commodity-oriented to becoming specialty focused in recent years. This should lead to better margins. Huntsman is unable to reduce costs like Eastman. These operational issues have led to an underperformance in the market and lower EV/EBITDA multiples – on a trailing three-year basis, Huntsman trades at approximately 6.5x EBITDA with Eastman and Celanese trading between 8 times and 9 times EBITDA.
Two main opportunities exist here. The first opportunity is operational – close the margin gap which should lead to a tightening of the multiple gap. Starboard has experience in doing this from a board-level position. Part of this can be accomplished by selling other commodity/undifferentiated assets. For 8x EBITDA, the company bought one of its commodity-centric businesses. It will be worth more than the current 6.5x multiple that the company was trading at by selling other businesses. Additionally, the commodity/specialty mix will shift more towards the high margin specialty side. This should result in a re-rate of the multiplier of specialty assets. The addition of stockholder directors, who hold the management responsible and create a more disciplined culture, can greatly improve margins.
Another option is to buy the company from a strategic or financial buyer. In the last few years, there have been many transactions in this area. You can find out more here. earlier this weekKraton signed an agreement with DL Chemical to sell to them for 8.5x EBITDA. Starboard, in either of these cases, would have been very useful from a Board level. This is an example of a company that could benefit greatly from having a shareholder representative.
Although the Huntsman family founded the company, it was more than 50 years ago. The family’s holdings in the company have decreased to single digits over time. It would not be possible for an independent board to conduct an impartial CEO search. A shareholder-friendly board wouldn’t also appoint the CEO to be chairman or president. While this does not mean that there shouldn’t be a change in the CEO, it speaks to both the culture and oversight of the board. Starboard shareholders would be greatly benefited by the appointment of a Starboard representative on its board. It should occur amicably. Starboard could, however, start nominating its slates on December 29th. We are highly skeptical that this will happen.
Ken Squire, the president and founder of 13D Monitor is an institution research service that focuses on shareholder activism. He also founded and managed the portfolio for the 13D Activist Fund which invests in a range of activist 13D investments.