Business: Huntsman Corp. is a global manufacturer of differentiated organic chemical products. 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 thermoset resins, curing agents and toughening agents, and carbon nanotubes additives; and base liquid and solid resins. The Textile Effects segment provides textile chemicals and 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 fiber, textile chemicals, and dye industries.
Activist Commentary: Starboard is a very successful activist investor and has extensive operational activism experience helping boards and management teams run companies more efficiently and improving margins. This is their 103rd 13D filing. In those 103 filings, they have averaged a return of 33.94% versus 13.26% for the S&P 500. Their average 13D hold time is 18 months.
Huntsman Corp. was founded by Jon M. Huntsman and is now run by his son, Peter R. Huntsman, who is chairman of the board, president and CEO. This company has been mostly stagnant since its IPO in 2005. During this time, the company has bought and sold a number of different assets, but its stock price, EBITDA and revenue growth have not moved significantly, and its margins have not improved. All the while, its best-in-class peers, Eastman Chemical Company and Celanese Corporation have achieved much higher margins and free cash flow generation than the company, causing them to significantly outperform Huntsman.
On a trailing three-year basis (accounting for the cyclicality of the business), Huntsman’s margins are approximately 14% while Eastman and Celanese are in the low to mid-20’s, resulting in a margin gap of roughly 800 basis points. While part of the margin gap could be explained by relative mixes of lower margin commodity and higher margin specialty chemicals, most of the gap is attributable to cost issues and lack of efficiency. In recent years, Huntsman has upgraded its portfolio from being more commodity focused to specialty focused, which should be leading to higher margins. However, unlike Eastman, Huntsman has not been able to cut a lot of the cost out. 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.
There are two main opportunities here. The first opportunity is operational – close the margin gap which should lead to a tightening of the multiple gap. This is something that Starboard has extensive experience doing from a board level. Part of this can be accomplished by selling other commodity/undifferentiated assets. The company sold one of its most commodity-centric businesses in 2019 for 8 times EBITDA. Selling other businesses at similar multiples will result in immediate value relative to the 6.5x multiple the company has been trading at. Moreover, this will also increase the commodity/specialty mix more toward the higher margin specialty side, which should re-rate the multiple of the remaining specialty assets. Additionally, margins can be greatly improved by adding stockholder directors who will hold management accountable and institute a more disciplined culture.
The other opportunity is to sell the company to either a financial or strategic buyer. There have been a lot of transactions in this space in the past few years. Just earlier this week, Kraton entered into an agreement to be sold to DL Chemical for 8.5x EBITDA. In either case, Starboard would be very helpful from a board level, and this is the type of company that could greatly use a shareholder representative on the board.
While the company was founded by the Huntsman family, that was over 50 years ago. Since then, their holdings have dwindled to single digits. In an arms-length CEO search by an independent board, it would be highly improbable that the CEO chosen was coincidentally the son of the founder. Moreover, a shareholder-friendly board would never also appoint that CEO as chairman and president. This is not saying that there should be a CEO change here, but it certainly speaks to the culture of the company and the oversight of the board. Appointing a Starboard representative to the board would greatly benefit shareholders and should happen amicably. If not, Starboard can start nominating its own slate on Dec. 29, but we highly doubt it will come to that.
Ken Squire is the founder and president of 13D Monitor, an institutional research service on shareholder activism, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.
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