US-based Westlake Chemical has finally sealed the deal with a $33/share, or $3.8bn, accepted offer to acquire polyvinyl chloride (PVC) producer Axiall to create the No 2 player in North American PVC and No 3 in chlor-alkali.

Westlake paid up to get the deal done. Its initial unsolicited offer in January was $20/share, which was then raised to $23.35/share in April.

Both offers were a combination of cash and shares where the last accepted bid was all cash.

South Korea’s Lotte Chemical – Axiall’s joint venture partner in their planned US ethane cracker – made a reported bid of over $2.6bn for Axiall in June, which was subsequently dropped days later as it cited the “difficult situation that Lotte has faced in Korea recently”, along with heated competition. Lotte Group is being investigated by South Korea’s government in a corruption probe.

There’s little doubt the Lotte bid lit a fire under Westlake to make a decisive move.

Lotte’s bid was believed to be in the $25-30/share range, according to Hassan Ahmed, analyst with Alembic Global Advisors.

If completed as expected in the fourth quarter of 2016, the $3.8bn deal (including the assumption of about $1.4bn in Axiall debt) would bring a number of benefits to Westlake – greater scale, cost and growth synergies, a better balance between its olefins and vinyls businesses, and ultimately earnings accretion.

Combined, the companies should have more options to achieve a greater level of back integration into ethylene.

Despite Cowen analyst Charles Neivert’s darkening outlook for the US commodity chemicals sector on higher expected demand for natural gas liquids (NGLs) and weakening pricing power in olefins, he remains positive on Westlake because of the pending Axiall transaction.

“Based on our outlook for Axiall, we see 2017 EBITDA [earnings before interest, tax, depreciation and amortisation] of around $500m (excluding synergies) which includes the remaining Building Products business as well as all of the vinyl chain and chlor-alkali facilities,” said Neivert in a research note.

“In addition, we believe that Westlake may be able to find synergies beyond the $100m identified in the transaction announcement,” he added.

With Neivert’s cash flow projection, the $3.8bn deal would be at a very reasonable multiple of 7.6x estimated 2017 EBITDA, a far cry from the headline 12.1x last 12 months adjusted EBITDA of $313m for Axiall.

Westlake itself is spinning the deal multiple at “6.1x Axiall Cycle Average Adjusted EBITDA”, including expected synergies, as it looks across the chlorvinyls cycle.

Cowen’s Neivert sees 50% higher synergies of $150m in the combination, and significant earnings accretion for Westlake.

The analyst sees the deal being accretive to Westlake’s earnings per share (EPS) by $0.64 in 2017.

However, this will not be enough to halt an expected profit decline on market factors.

He expects Westlake to earn $3.59 in 2017 – a drop from an expected $3.90 in 2016 and $4.54 in 2015.

Westlake will become more earnings balanced in its two product segments after the Axiall deal.

In 2015, Westlake’s olefins segment posted $747m in operating income versus $254m for the vinyls segment.

And as the ethylene cycle is expected to turn down in the coming years with a wave of new capacity coming on in the US, the chlor-alkali/PVC cycle is expected to turn up as little new capacity is added.

MARKET ASSESSES NEW WESTLAKE CHEMICAL

The pending $3.8bn acquisition of Axiall by Westlake Chemical will mark the second absorption of a US chlor-alkali producer within 12 months if, as expected, the deal is consummated by the end of 2016.

Besides reducing the number of US market players, it will catapult Westlake from the No 6 US producer of polyvinyl chloride (PVC) to No 2, behind Shintech.

Additionally, Westlake, now the No 6 US chlor-alkali producer (chlorine and caustic soda) would become No 3, behind Olin and Occidental Chemical.

The second reshuffling of the producer lineup has some in the buyer community worried that the commodity markets for PVC, chlorine and caustic soda could become less competitive and give producers too much pricing power.

The $5bn merger of Dow Chemical’s assets with Olin’s operations in November created the largest chlor-alkali producer in the US and reduced the number of major players in the market from seven to six. Now, the exit of Axiall will reduce the number to five, leaving Formosa Plastics, Occidental Chemical, Olin and Shintech, along with the new and bigger Westlake.

Market watchers are also handicapping the ability of the two companies to combine in a seamless way, saying that their cultures, modes of operation and market positions are diametrically opposed.

“The philosophies of the two companies are very different,” said a trader who works with both companies to sell into international markets.

Still, many market players also think that the buyout will be beneficial, overall, for the US market: Old and unreliable Axiall plants will be better maintained and safer; additional integration to ethylene from US shale gas will make the joined companies more efficient.

“It’s a good thing for Westlake,” said a distributor of caustic soda. “They will get more volume, be able to back-integrate some of Axiall’s PVC production and gain pricing power. But it will give the producers more pricing power.”