Exclusive: Clariant under pressure to bulk up or sell after Huntsman talks fail

By Ludwig Burger

FRANKFURT (Reuters) - Informal talks between Swiss chemicals group Clariant (CLN.S) and its U.S. peer Huntsman Corp (HUN.N) over a tie-up ended late last year over a disagreement about who would play the lead role, three people familiar with the matter told Reuters.

The failed deal is the strongest sign yet that Clariant - a maker of aircraft de-icing fluids, pesticide ingredients and plastic colouring - would rather go it alone than be sold or play the junior role in a merger.

Huntsman was keen to sell off Clariant's Plastic and Coatings division, which accounts for more than 40 percent of its revenues, one of the sources said. This would have given Huntsman the dominant role in the merged group.

Spokesmen for Clariant and Huntsman declined to comment.

Analysts have said that without that unit, Clariant - which is worth $6.2 billion (5.1 billion pounds) on the stock market versus Huntsman’s $5.3 billion - would be vulnerable to a takeover. They have said for a while Clariant needed to decide whether it was hunter or prey in the busy mergers and acquisitions market.

Many European companies have embarked on deal making as growth in the chemicals industry has slowed. European businesses have particularly suffered, losing market share to rivals in Asia, where demand is growing faster, or to North America, where energy is cheaper.

BASF (BASFn.DE), Solvay (SOLB.BR), Evonik (EVKn.DE) and Lanxess (LXSG.DE) have agreed multi-billion takeovers since mid-2015. In the U.S., a $130 billion merger and three-way split between Dow (DOW.N) and DuPont (DD.N) is underway.

Clariant is under pressure from investors to follow suit and find a partner that could help it cut costs and revive growth as part of a bigger structure. Being part of a larger group could also help it negotiate lower costs of supplies.

But Chief Executive Hariolf Kottmann and his counterpart Peter Huntsman, could not reach agreement, the sources said.

PLASTICS AND COATINGS

Kottmann has spent several years restructuring Clariant. He divested underperforming businesses including textile and paper chemicals in 2012 and placed more responsibility with lower level managers for faster decision-making.

In mid-2015 he started carving out Plastics and Coatings into a separately managed but wholly-owned entity.

But with fewer opportunities left to fine-tune the business internally, investor pressure is growing on management to identify a growth strategy for Clariant, which was formed in the mid 1990s from parts of Switzerland's Sandoz and Germany's Hoechst.

Clariant noted the uncertain environment for the industry this year when it reported 2016 results in February. It said that sales would grow in 2017 but did not give a specific forecast. Revenues edged a currency-adjusted 2 percent higher to 5.85 billion Swiss francs last year. ($5.8 billion)

Dan Scott, an analyst at Credit Suisse's private banking arm said estimated revenue growth rates through 2019 at Clariant are among the lowest in the industry.

"We see the scope of further improvements via inorganic growth as we believe Clariant has largely completed its organic transformation," he told Reuters.

Clariant has said it still sees areas of organic growth in products such as industrial catalysts that boost the output of petrochemical reactors, which are likely to benefit from a rebound in petrochemical markets.

Other growth areas are ingredients for shampoos and skin creams that are gentle on the skin and the environment.

SHAREHOLDER SUPPORT

Clariant has major shareholders that are satisfied with it staying independent for now, the sources said, giving it some protection against unsolicited takeovers.

Kottmann has the backing of these long-term investors who trust his measured approach to dealmaking and record of driving organic growth.

One of them is a group made up mostly of Bavarian families that used to control Sued-Chemie AG. When Clariant acquired the German maker of industrial catalysts in 2011, they stayed on board and took an almost 14 percent stake in the buyer.

Another one is Amsterdam-based APG, a manager of Dutch pension assets which holds a 5 percent stake, the sources said.

APG and Konstantin Winterstein, a member of the Bavarian shareholder group and a non-executive director at Clariant, declined to comment.

NO MAJOR DEAL

Clariant has made acquisitions in recent years but the deals have been small or medium-sized such as the purchase of two Texas-based suppliers of chemicals for oil and gas extraction for about $360 million last year.

Clariant's absence from major M&A deals has not been for lack of trying and efforts have picked up recently, the sources said.

Kottmann, who made a career at Germany's Hoechst AG and its successor companies and took the helm at Clariant in 2008, has considered various combinations with rivals in the last year, they said.

But a major deal has been elusive because paying billions in cash would stretch its finances and CEO Kottmann does not want Clariant, which he has shaped considerably, to come apart as a junior partner in any merger deal or in a sale.

Bernstein analysts, among others, have urged Clariant to pursue a timely exit from lower-margin Plastics and Coatings to avoid the risk of another costly overhaul. But other industry experts say the three remaining units are too small to sustain the overhead costs of the group's corporate infrastructure, making it a takeover target.

Clariant said on Feb 16 that the Plastics and Coatings division was not for sale for now, but could in future be sold to fund a major acquisition.

"Plastics and Coatings could be viewed as a special kind of currency, just in case there is an opportunity to upgrade our portfolio with an additional business or with a business which fits very well into our existing portfolio," Kottmann told analysts in a call.

($1 = 1.0143 Swiss francs)

(Additional reporting by Greg Roumeliotis in New York, Arno Schuetze in Frankfurt, Pamela Barbaglia and Clara Denina in London; editing by Anna Willard)