The updated version of Huntsman’s planned titanium dioxide (TiO2) business spinoff will not include textile effects. The details show a more streamlined TiO2 and performance additives producer with manageable debt in the early stages of an upcycle.

“The P&A [pigments and additives] business we plan to spin today… is being launched at a stronger time than we had planned six months ago,” said Peter Huntsman, president and CEO of Huntsman, and likely chairman of the new company. Venator, as the new business will be called, is “Hunter” in Latin, and a nod to the Huntsman legacy. Wall Street analysts quickly jumped on the notion that the company will be “hunting” for a higher valuation.

It has a good chance of doing just that, with a modest debt load – not entirely common for commodity chemical businesses being spun off where stacks of liabilities are often piled onto the jettisoned unit. Venator’s capital structure will be similar to Huntsman’s 3.5x debt/earnings before interest, tax, depreciation and amortisation (EBITDA) on a last 12 months (LTM) basis, said Sean Douglas, chief financial officer of Huntsman, on the spinoff conference call.

That 3.5x debt/EBITDA level is relatively reasonable – it’s certainly not low, but not at an alarming level. Chemours, the TiO2 and fluorochemicals spinoff from 
DuPont in July 2015, came out with a debt/EBITDA multiple of 5.2x on an LTM basis. Univar, admittedly a completely different business (chemical distribution) with less earnings volatility, went public in mid-2016 with a leverage ratio of about 4.6x 2015 EBITDA.

In the last 12 months to the latest reported results in Q3 2016, the businesses comprising Venator generated $85m in adjusted EBITDA on $2.1bn in sales. Around 70% of sales were from TiO2 and the rest from performance additives. On a geographic basis, 43% of sales were in Europe, 26% in the US and Canada, 19% in Asia Pacific and 12 in the rest of the world. Venator will be incorporated in the US but have its principal executive office in the UK.

Assuming the 3.5x debt/EBITDA multiple, that comes to about $298m in debt. However, that likely will be higher on an LTM basis by the end of Q2 2017. Even after Q4 2016 results, the LTM EBITDA will likely be higher as TiO2 pricing improved in that period.

Huntsman sees the pattern of TiO2 price increases seen in 2016 – it captured about $300/tonne that year – continuing in 2017, with a doubling of EBITDA over 2016 levels, which were about double those of 2015, executives noted on the conference call. Huntsman estimates Venator’s normalised annual EBITDA – average cash flow over the cycle – at $400m on sales of $2.6bn. On such a normalised basis, assuming debt is around $298m, we’re looking at a debt/EBITDA ratio of 0.75x.

Yet the new company will focus on reducing debt. Part of getting to that $400m in normalised EBITDA will be $75m in annual EBITDA business improvements expected to be achieved by early 2019 – from volume improvement, optimisation of the manufacturing footprint and a reduction in fixed costs. The improvements will require about $50m in cash outlays. Huntsman will retain 19.9% of the shareholder voting rights of Venator, and have an economic interest of up to 40% of the company.

EXCLUDING TEXTILE EFFECTS

Huntsman’s decision to exclude the textile effects business makes Venator a more focused operation. An improving TiO2 price trend likely helped in the decision.

“With three price increases in 2016 and additional increases in Q1 2017, TiO2 has recovered sufficiently to where less cyclical textile chemicals no longer needs to be included,” said UBS analyst John Roberts.