Monty Rakusen | Image source | Getty Images
Company: Huntsman Corp. (HUN)
Business: Huntsman Corp. is a global manufacturer of differentiated organic chemicals. The company operates in four segments: polyurethanes, performance products, advanced materials and textile effects. The Performance Products segment manufactures amines and maleic anhydrides including ethylene oxide, propylene oxide, glycols, ethylene dichloride, caustic soda, ammonia, hydrogen, methylamines and acrylonitrile. The Advanced Materials segment offers epoxy, acrylic, polyurethane and acrylonitrile-butadiene-based polymer formulations; high performance thermosetting resins, curing agents and curing agents, and carbon nanotube additives; and liquid and solid base resins. The Textile Effects segment supplies chemicals and textile dyes. The company’s products are used in a range of applications including adhesives, aerospace, automotive, construction products, durable and non-durable consumer products, electronics, insulation, medical , packaging, coatings and construction, power generation, refining, synthetic fibers, textiles, chemical and dye industries.
Stock market value: $ 6.8 billion ($ 30.68 per share)
Percentage of ownership: 8.38%
Average cost: $ 26.35
Activist comment: Starboard is a very successful activist investor and has extensive experience in operational activism helping boards and management teams run businesses more effectively and improve their margins. This is their 103rd 13D deposit. In these 103 deposits, they obtained an average return of 33.94% against 13.26% for the S&P 500. Their average 13D holding time is 18 months.
Starboard acquired an 8.38% position for investment purposes.
Huntsman Corp. was founded by Jon M. Huntsman and is now headed by his son, Peter R. Huntsman, who is Chairman of the Board, President and CEO. This company has mostly stagnated since its IPO in 2005. During this time, the company bought and sold a number of different assets, but its stock price, EBITDA and revenue growth did not. have not changed much and its margins have not improved. Meanwhile, its leading peers Eastman Chemical Company and Celanese Corporation achieved much higher margins and free cash flow generation than the company, causing them to significantly outperform Huntsman.
On a three-year basis (taking into account the cyclicality of the business), Huntsman’s margins are around 14%, while Eastman and Celanese are in the low to mid-1920s, which results in a margin spread of around 800 basis points. While part of the margin variance can be explained by relative combinations of lower margin commodities and higher margin specialty chemicals, most of the variance is due to cost issues. and a lack of efficiency. Over the past few years, Huntsman has improved its portfolio from a more commodity-focused portfolio to a specialist portfolio, which is expected to result in higher margins. However, unlike Eastman, Huntsman has not been able to cut much of the cost. These operational issues led to the market underperforming and declining EV / EBITDA multiples – on a rolling three-year basis, Huntsman is trading at around 6.5x EBITDA, with Eastman and Celanese trading between 8 and 9 times EBITDA.
There are two main opportunities here. The first opportunity is operational: to close the margin gap which should lead to a tightening of the multiple gap. This is something Starboard has extensive experience doing at the board level. Part of this can be accomplished by selling other undifferentiated commodities / assets. The company sold one of its most commodity-oriented businesses in 2019 for 8x EBITDA. Selling other companies at similar multiples will result in immediate value compared to the 6.5 times multiple the company traded. In addition, this will also increase the product / specialty mix further towards the higher margin specialty side, which should reassess the multiple of the remaining specialty assets. Additionally, margins can be significantly improved by adding shareholder directors who will hold management accountable and institute a more disciplined culture.
The other opportunity is to sell the business to a financial or strategic buyer. There have been a lot of transactions in this space over the past few years. Only earlier this week, Kraton has entered into a sale agreement to DL Chemical for 8.5 times EBITDA. Either way, Starboard would be very useful at the board level, and it is the type of business that could greatly use a shareholder representative on the board.
Although the company was founded by the Huntsman family, that was over 50 years ago. Since then, their holdings have fallen to single digits. In an independent CEO search by an independent board, it would be highly unlikely that the CEO chosen was by chance the founder’s son. Additionally, a shareholder-friendly board would never appoint that CEO as chairman and chairman. That’s not to say there should be a CEO change here, but it certainly speaks to the culture of the company and the oversight of the board. The appointment of a Starboard representative to the board of directors would be of great benefit to shareholders and should be done amicably. Otherwise, Starboard can start naming its own roster on December 29, but we highly doubt it will.
Ken Squire is the founder and chairman of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist investments. .