Monty Rakusen | Image source | Getty Images
Company: Huntsman Corp. (HUN)
Companies: 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 produces amines and maleic anhydrides, including ethylene oxide, propylene oxide, glycols, ethylene dichloride, caustic soda, ammonia, hydrogen, methylamines and acrylonitrile. The Advanced Materials segment offers polymer formulations based on epoxy, acrylic, polyurethane and acrylonitrile-butadiene; Duroplastic high-performance resins, hardeners and toughness improvers as well as additives for carbon nanotubes; and liquid and solid base resins. The Textile Effects segment offers textile chemicals and dyes. The company’s products are used in a range of applications including adhesives, aerospace, automotive, construction products, durable and short-lived consumer products, electronics, insulation, medicine, packaging, coatings and construction, power generation, refining, synthetic fibers, textiles chemistry – and dye industry.
Market value: $ 6.8 billion ($ 30.68 per share)
Percentage ownership: 8.38%
Average cost: $ 26.35
Comment from the activists: Starboard is a very successful activist investor and has extensive operational activism experience helping boards and management teams run businesses more efficiently and improve margins. This is her 103rd 13D filing. In those 103 submissions, they achieved an average return of 33.94% versus 13.26% for the S&P 500. Their average 13D hold time is 18 months.
Starboard has acquired an 8.38% stake for investment purposes.
Huntsman Corp. was founded by Jon M. Huntsman and is now led by his son Peter R. Huntsman, who is Chairman of the Board, President and CEO. This company has largely stagnated since it went public in 2005. During that time, the company bought and sold a number of different assets, but its share price, EBITDA, and revenue growth haven’t changed significantly, and margins haven’t improved. Meanwhile, best-in-class rivals Eastman Chemical Company and Celanese Corporation have had 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 cyclical nature of the business), Huntsman’s margins are around 14%, while Eastman and Celanese are in the lower to mid-twenties, resulting in a margin gap of around 800 basis points. While part of the margin gap could be explained by the relative mix of raw materials with lower margins and specialty chemicals with higher margins, most of the gap is due to cost issues and a lack of efficiency. In recent years, Huntsman has upgraded its portfolio from a more commodity-centric to a specialty-centric portfolio, which should result in higher margins. Unlike Eastman, however, Huntsman was unable to cut much of the cost. These operational issues have resulted in market underperformance and lower EV / EBITDA multiples – based on the past three years, Huntsman is trading at around 6.5x EBITDA, while Eastman and Celanese are trading between 8 and 9 times EBITDA will.
There are two main options here. The first option is operational – closing the margin gap, which should narrow the multiple gap. This is something that Starboard has extensive board-level experience with. Part of this can be achieved through the sale of other raw materials / undifferentiated assets. The company sold one of its commodity-centric businesses for 8 times EBITDA in 2019. Selling other companies at similar multipliers results in an instant value compared to 6.5 times what the company was trading at. In addition, this will also increase the raw material / specialty mix more in the direction of the higher-margin specialty side, which should re-evaluate the multiple of the remaining specialty assets. In addition, margins can be greatly improved by adding directors of shareholders who hold management accountable and introduce a more disciplined culture.
The other option is to sell the company to either a financial or strategic buyer. There have been many transactions in this area in recent years. Just earlier this week, Kraton signed an agreement to sell it to DL Chemical for 8.5 times EBITDA. Either way, Starboard would be very helpful at the board level, and this is the type of company that a shareholder representative on the board could very well use.
The company was founded by the Huntsman family, but that was over 50 years ago. Since then, their stocks have shrunk in the single digits. In the event of an independent CEO search by an independent board of directors, it would be highly unlikely that the CEO chosen happened to be the founder’s son. In addition, a shareholder-friendly board would never appoint this CEO as chairman and president. That doesn’t mean there should be a CEO change here, but it certainly speaks for the company’s culture and oversight of the board. The appointment of a Starboard representative to the board of directors would be very beneficial to shareholders and should be consensual. If not, Starboard may begin nominating its own list on December 29th, but we strongly doubt it will.
Ken Squire is the founder and president of 13D Monitor, an institutional shareholder activism research service, and the founder and portfolio manager of the 13D Activist Fund, a mutual fund that invests in a portfolio of 13D activist investments.