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Monty Rakusen | Picture Supply | Getty Photographs
Firm: Huntsman Corp. (HUN)
Enterprise: Huntsman Corp. is a worldwide producer of differentiated natural chemical merchandise. The corporate operates in 4 segments: Polyurethanes, Efficiency Merchandise, Superior Supplies, and Textile Results. The Efficiency Merchandise section manufactures amines and maleic anhydrides, together with ethylene oxide, propylene oxide, glycols, ethylene dichloride, caustic soda, ammonia, hydrogen, methylamines, and acrylonitrile. The Superior Supplies section gives epoxy, acrylic, polyurethane, and acrylonitrile-butadiene-based polymer formulations; excessive efficiency thermoset resins, curing brokers and toughening brokers, and carbon nanotubes components; and base liquid and strong resins. The Textile Results section offers textile chemical substances and dyes. The corporate’s merchandise are utilized in a variety of functions, together with adhesives, aerospace, automotive, development merchandise, sturdy and non-durable client merchandise, electronics, insulation, medical, packaging, coatings and development, energy era, refining, artificial fiber, textile chemical substances, and dye industries.
Inventory Market Worth: $6.8B ($30.68 per share)
Activist: Starboard Worth
Proportion Possession: 8.38%
Common Price: $26.35
Activist Commentary: Starboard is a really profitable activist investor and has in depth operational activism expertise serving to boards and administration groups run corporations extra effectively and enhancing margins. That is their 103rd 13D submitting. In these 103 filings, they’ve averaged a return of 33.94% versus 13.26% for the S&P 500. Their common 13D maintain time is eighteen months.
What’s Taking place?
Starboard acquired an 8.38% place for funding functions.
Behind the Scenes:
Huntsman Corp. was based by Jon M. Huntsman and is now run by his son, Peter R. Huntsman, who’s chairman of the board, president and CEO. This firm has been principally stagnant since its IPO in 2005. Throughout this time, the corporate has purchased and bought quite a lot of completely different property, however its inventory value, EBITDA and income progress haven’t moved considerably, and its margins haven’t improved. All of the whereas, its best-in-class friends, Eastman Chemical Firm and Celanese Company have achieved a lot increased margins and free money move era than the corporate, inflicting them to considerably outperform Huntsman.
On a trailing three-year foundation (accounting for the cyclicality of the enterprise), Huntsman’s margins are roughly 14% whereas Eastman and Celanese are within the low to mid-20’s, leading to a margin hole of roughly 800 foundation factors. Whereas a part of the margin hole could possibly be defined by relative mixes of decrease margin commodity and better margin specialty chemical substances, a lot of the hole is attributable to value points and lack of effectivity. In recent times, Huntsman has upgraded its portfolio from being extra commodity targeted to specialty targeted, which must be resulting in increased margins. Nevertheless, not like Eastman, Huntsman has not been capable of reduce numerous the fee out. These operational points have led to an underperformance available in the market and decrease EV/EBITDA multiples – on a trailing three-year foundation, Huntsman trades at roughly 6.5x EBITDA with Eastman and Celanese buying and selling between 8 instances and 9 instances EBITDA.
There are two principal alternatives right here. The primary alternative is operational – shut the margin hole which ought to result in a tightening of the a number of hole. That is one thing that Starboard has in depth expertise doing from a board degree. A part of this may be completed by promoting different commodity/undifferentiated property. The corporate bought one in every of its most commodity-centric companies in 2019 for 8 instances EBITDA. Promoting different companies at comparable multiples will end in quick worth relative to the 6.5x a number of the corporate has been buying and selling at. Furthermore, this may also enhance the commodity/specialty combine extra towards the upper margin specialty facet, which ought to re-rate the a number of of the remaining specialty property. Moreover, margins will be significantly improved by including stockholder administrators who will maintain administration accountable and institute a extra disciplined tradition.
The opposite alternative is to promote the corporate to both a monetary or strategic purchaser. There have been numerous transactions on this house up to now few years. Simply earlier this week, Kraton entered into an settlement to be bought to DL Chemical for 8.5x EBITDA. In both case, Starboard can be very useful from a board degree, and that is the kind of firm that would significantly use a shareholder consultant on the board.
Whereas the corporate was based by the Huntsman household, that was over 50 years in the past. Since then, their holdings have dwindled to single digits. In an arms-length CEO search by an unbiased board, it might be extremely unbelievable that the CEO chosen was coincidentally the son of the founder. Furthermore, a shareholder-friendly board would by no means additionally appoint that CEO as chairman and president. This isn’t saying that there must be a CEO change right here, but it surely actually speaks to the tradition of the corporate and the oversight of the board. Appointing a Starboard consultant to the board would significantly profit shareholders and will occur amicably. If not, Starboard can begin nominating its personal slate on Dec. 29, however we extremely doubt it is going to come to that.
Ken Squire is the founder and president of 13D Monitor, an institutional analysis service on shareholder activism, and the founder and portfolio supervisor of the 13D Activist Fund, a mutual fund that invests in a portfolio of activist 13D investments.
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