ERJ staff report (PR)
Houston, Texas – The board of Kraton Performance Polymers Inc. intends to withdraw its approval for the previously announced agreement to combine with LCY Chemical Corp.'s styrenic block copolymer (SBC) operations, Kraton announced 30 June.
Under the deal, Kraton is required to give Taiwan-based LCY at least five business days' written notice of the intention to withdraw or change its recommendation. During this time, the parties can negotiate revisions or adjustments to the terms of the ‘combination agreement’, which was signed on 28 Jan.
A notice from Kraton’s board cited a decline in the operating results for the LCY SBC business in the first quarter of 2014 and the related decline in its forecasted results. More significantly, it cited a decline in Kraton's own stock price and negative reactions from stockholders following a disclosure last week.
Weak demand, inventory overhangs and untimely capacity expansions left LCY Chemical Corp. far adrift of expectations for the styrene butadiene block copolymer business, Kraton bosses revealed 24 June. They, however, signalled their commitment to the deal, which was on-track from completion by the year-end.
LCY's shortfall included an 80-percent year-on-year decline in first quarter earnings (EBITDA): theTaiwan-based company producing a first-quarter EBITDA of just $2.9 million (€2.1 million) on volumes of 62 kilotonnes (kt) - compared to $20.6 million on 65kt in the prior year first quarter.
The decline, said Kraton, was linked to problems in China, which accounts for over 50 percent of LCY's SBC business by volume.
The shortfall was due to “a short term imbalance in supply-demand situation”, according to Kevin Fogarty, president and CEO of Kraton. Weakness in footwear and paving demand was only partly offset by growth in adhesives, compounding and roofing, he reported.
The reduction in overall demand, coincided with a number of SBS expansions: LCY, for example, bringing 100kt of new capacity on stream in 2013. The over-supply led to pricing pressure, causing raw material margins to fall by $400/tonne in the final quarter of 2013.
“In China, LCY saw an unexpected drop in demand, which came just as capacity additions were coming on-line. This was further exacerbated by excess SBS inventory levels carried over from 2013,” said Fogarty.
However, Kraton expects these factors to ease in the second half of 2014 as China returns to traditional GDP growth rates.
Margins have been recovering since mid-April, as producers eliminate excess production, reported Fogarty. This, he added, should help to rebalance the market by mid-2014 - as should a pick in demand, particularly in paving applications.
Kraton also posted figures showing that estimated SBS (styrene butadiene block copolymer) demand in China grew 1.3 percent in 2013 to 632kt. This year it is forecast to grow 3.8 percent to 656kt, followed by growth of 5.5 percent to 682kt in 2015.
And, while he warned that it could take the market up to two years to recover, Fogarty concluded: “The Kraton board has concluded that taking onto account all these factors that this deal still represents very good value for shareholders.”
On 28 Jan, Kraton announced the deal to combine with LCY Chemical Corp. in an agreement that called for LCY to contribute its SBC business in exchange for newly issued shares in a combined company. Kraton's shareholders and LCY would then each own 50 percent of the outstanding shares of the combined enterprise.
On completion Kraton, as well as the entities owning LCY's SBC business, are to become subsidiaries of the combined company, which is to be incorporated in the UK and be listed on the New York Stock Exchange.
In January, Fogarty said Kraton expected the combination to result in synergies of $65 million by 2017, through fixed-cost rationalisation, optimisation of variable costs and through reductions in overhead costs. The synergies were expected to cost $70 million over three years to achieve.