Thailand-based Indorama has snagged Brazil-based surfactants producer Oxiteno at a reasonable price, especially in today’s frothy chemicals mergers and acquisitions (M&A) market.

Indorama will buy Oxiteno from the Brazilian conglomerate Ultrapar for $1.3bn. Of the total amount, $1.15bn would be paid upon closing that is expected in Q1 2022, with the remaining $150m paid in 2024 with no conditions attached.

Indorama will quickly become a surfactants powerhouse, building on its $2.0bn acquisition of Huntsman’s surfactants and intermediates business in January 2020. Combined downstream ethylene oxide derivatives (EOD) sales will be $1.93bn based on 2020 figures and $2.16bn based on sales in the last 12 months to Q2 2021.

With Oxiteno, Indorama said it will become the largest nonionic producer of surfactants in the Americas, with 32% of the total 2.6m tonnes/year of capacity in the region – up from Indorama’s 9%.

The $1.3bn deal represents an EV/EBITDA (enterprise value/earnings before interest, tax, depreciation and amortisation) multiple of about 8.1x, based on Oxiteno’s adjusted recurring EBITDA of Brazilian reais (R) 847m ($161m) in the last 12 months through Q2 2021.

That’s probably the cleanest way to look at it, as there are ‘multiple’ multiples being thrown around.

Ultrapar on its conference call pointed out that the $1.3bn sale price for Oxiteno represents 10-11x average annual EBITDA of around $120m-130m for the past 3-5 years, thus taking into account the cyclicality of the business.

However, it’s also worth pointing out that Oxiteno’s asset base has increased during this time, especially with its relatively new US surfactants plant and thus its earnings potential.

Indorama points out that it is paying just 7.0x for Oxiteno’s Latin American downstream ethylene oxide derivatives (EOD) business, based on the average of 2018-2020 adjusted EBITDA, and 5.4x its Latin American intermediates (ethylene glycol) business on the same basis.

Furthermore, it gives a 6.2x multiple on Oxiteno’s US downstream assets. But since the US assets actually posted an EBITDA loss of $15m in 2020 and Indorama considers this a “capital work in progress”, according to a footnote in its deal presentation, it bases this multiple on estimated 2023 EBITDA.

Oxiteno started up its first US surfactants plant in Pasadena, Texas in late 2018 but it has been plagued by operational issues. In November 2019, Oxiteno CEO Joao Parolin told ICIS the company planned operational improvements and a tripling of production at the US alkoxylates plant.

Production should reach 120,000 tonnes/year of mixed products in 2022-2023 at the Pasadena plant.

The nameplate capacity of the Pasadena plant is 170,000 tonnes/year, but that figure assumes that the unit will produce just one product and not a mix.

Analysis based on 2020 results

Now let’s look at Oxiteno’s 2020 financials to get a better sense of what the parts of Oxiteno generate on a geographic basis. Of Oxiteno’s total 2020 sales of $991m, 68% was in Brazil, 12% in Other Latin America, 14% in North America (we assume Mexico is included here), and 5% in Others, according to the Indorama presentation.

On an adjusted EBITDA basis in 2020, Latin America generated $202m (higher than the 2018-2020 average of $152m) while the US business lost $15m in 2020, as noted in the Indorama presentation. So Latin America combined with the US generated about $187m in EBITDA in 2020.

Switching over to Ultrapar’s 2020 financial report, reported in Brazilian reais, Oxiteno generated total adjusted recurring EBITDA of R629m in 2020 – or $120m at today’s exchange rates. This would imply Oxiteno’s Mexico business, along with those in the Other category, generated a substantial loss.

Oxiteno operates plants at three sites in Mexico – Coatzacoalcos, Guadalajara and San Juan del Rio. However, it relies on EO feedstock from local producer Pemex, which has faced shortages of ethane feedstock itself to produce ethylene and then EO.

Based on Ultrapar’s 2020 report breaking out adjusted recurring EBITDA of R629m for Oxiteno, the deal is being done at 10.8x 2020 EBITDA. That’s also within the range of its 10-11x average EBITDA based on the past 3-5 years, according to Ultrapar.

Clearly there are risks along with upside for Indorama in taking on Oxiteno. First there’s the currency risk, as Brazil accounts for around 68% of sales. Brazil’s currency has been very volatile, falling almost 40% against the US dollar in the past five years, although up about 3% in the past year with some major swings along the way.

Then there’s the Mexico operations, where there’s little visibility on if and when state energy producer Pemex might be able to supply adequate EO feedstock.

The US operations offer both risk and potential upside. The Pasadena surfactants plant will require additional capital investment to boost production reliability.

However, Indorama sees its Oxiteno USA turnaround plan reversing 2020’s EBITDA loss of $15m into EBITDA of $43m by 2023, boosted by $30m in synergies. Part of this will involve optimising EO and propylene oxide (PO) feedstock from Indorama’s Port Neches, Texas site, while developing a PO-led portfolio. If the plan is successful, it would make the deal valuation far more attractive.

Indorama sees around $100m in EBITDA synergies frothe Oxiteno acquisition by 2025. Ethylene glycol feedstock integration should benefit Indorama’s polyethylene terephthalate (PET) and fibres business in Latin America, it noted. ■

Additional reporting by Al Greenwood