Korea's Honam Petrochemical Corp will pay W1.52 trillion ($1.25 billion) to buy a 72.6% stake in Malaysia's largest petrochemicals maker, Titan Chemicals Corp, the Korean company said in a statement late last week. It is Honam's first ever overseas purchase and Korea's largest foreign acquisition this year.
Korean chemical companies are looking to grow overseas as the tentative global economic recovery has raised demand for ethylene, a raw material used to make plastics and synthetic fibres. Honam, which is Korea's second biggest ethylene producer, said its annual ethylene production capacity will rise from 1.75 million tonnes to 2.47 million tonnes after the purchase. It also hopes the deal will lead to more business in Southeast Asia, China and the Middle East, lifting its revenue to W12 trillion this year.
The company issued a statement to Bursa Malaysia on Friday saying the acquisition will strengthen its overseas operations by securing international production bases in high-growth markets in areas with access to competitive feedstock. It added that the deal will also help diversify its business model and sustain growth in future years. Overseas sales currently account for 55% of Honam's total revenues.
The acquisition will propel Honam from fourth to the second biggest petrochemicals manufacturer in Asia, behind Taiwan's Formosa Petrochemical. Titan is Malaysia's biggest producer of olefins and polyolefins, which are used for making plastic parts in appliances and automobiles. It reported sales of $1.64 billion last year.
Honam will pay M$2.35 per share for The Chao Group's 37.3% stake in Titan and for the combined 35.3% held by Malaysian state-owned investment fund Permodalan Nasional Bhd (PNB) and Amanah Raya Trustee. The price represents a 27% premium over the stock's closing price of M$1.85 last Thursday. Honam has to make an unconditional offer to the remaining shareholders at the same price by November.
The deal is priced at 7.6 times Titan's estimated earnings this year, and was considered "reasonable" by analysts. According to HSBC, which acted as Honam's international adviser, it equals an enterprise value-to-Ebitda multiple (adjusted for the business cycle) of less than six times. Titan said its second quarter revenues were M$1.69 billion ($520 million) compared with M$1.37 billion in the same period last year, but its earnings were lower at M$72.13 million versus M$174 million a year ago. Its net assets per share was M$2.42 at the end of the second quarter.
Honam's share price rose 8.8% to close at W161,500 on Friday, its highest close since October 2007, despite a 0.7% decline by the benchmark Kospi index. Titan was suspended from trading on the Malaysian bourse.
Titan has been looking for an investor since 2007 to expand its overseas operations, while Honam has been frustrated in its efforts to grow in China -- notably it failed to merge with KP Chemical last November. Honam, which is 57% owned by South Korea's seventh-largest business conglomerate, Lotte Group, has sufficient cash reserves to fund the purchase, but it might raise additional finance in the capital markets, said HSBC.
"We got this deal done quickly given our very strong relationship with Titan senior management and with Honam. Both sides trusted HSBC and believed it was a win-win for all parties," said an HSBC spokesperson.
RHB Investment Bank is acting as Honam's domestic adviser, and Goldman Sachs is advising Titan.