Elementis chromium division seen as logical divestment candidate amid leverage pressure, advisors say

13 August 2020 - 03:07 pm UTC

Elementis  could consider selling its chromium business to ease leverage pressure amid weakened demand and poor trading performance, according to several sector bankers.
The UK specialty chemicals company’s chromium division is the most logical disposal candidate as a value destroyer in an otherwise strong portfolio, one of the bankers said.
The unit, which was acquired by Elementis from US peer OxyChem in 2002, is valued at around GBP 150m (USD 197m), the banker said. The division could fetch 6x EBITDA in a sale, a second banker said.
Operating profit for the chromium unit fell to USD 3m on revenues of USD 78m in 1H20, down from USD 11m on USD 88m turnover in 1H19 amid weakened demand, according to interim results. Group revenues slid to USD 67m in 1H20 from USD 85m in 1H19.
A disposal is most likely as Elementis needs to reduce leverage after taking on a large amount of debt in its last deal, a third banker said.
Elementis agreed to acquire Mondo Minerals, a Finnish talc mining company, from Advent Mondo for USD 500m, funded in part by a USD 230m rights issue.
With more than USD 300m available in cash and undrawn credit facilities, the company’s leverage is at 3.1x EBITDA – up from 2.8x in 1H19 – with covenants kicking in at 3.75x, according to Dealreporter analytics. 
The sale of German specialty chemicals firm Lanxess’s chromium business to China’s Brother Enterprises or EUR 83.05m in August 2019 could provide Elementis with a sound divestment model, the bankers said. 
Lanxess’s chromium unit had formed part of the leather chemicals segment, which generates sales revenue of EUR 500m, and is expected to draw interest from private equity and trade buyers in an auction, as reported by this news service.
A divestment by Elementis would follow the wider corporate streamlining trend among large chemical players looking to boost returns and placate activists by carving out non-core or underperforming assets.
Besides Lanxess, expected carveouts include Lonza’s planned sale of its Specialty Ingredients unit and Arkema’s upcoming disposal of its polymethyl methacrylate (PMMA) business Altuglas International, as well as Solvay’s [EBR:SOLB] German asset package sale, as reported by this news service.
Potential sale hurdles 
But a potential sale is not without obstacles, according to the bankers, with the first noting it will be difficult to find a buyer for the division, which trades below book value. 
Elementis trades at a price-to-book (P/B) ratio of 0.67x, significantly lower than peers Synthomer  and Victrex  which deal at 2x and 3.7x respectively, according to Dealreporter analytics.
A chromium sale will be trickier for Elementis than Lanxess given that the firm’s core business is in metallurgy rather than chemicals, the first banker added.
There are also long-term liabilities associated with the disposal of chromium sites that could hamper a sale, including potential environmental and health hazards, the second banker said.
To view the full article, please email Kasia Koslowska.

by Georgina Barnard and Ryan Gould in London with analytics by Saritha Dantu