Jan 29 2014
Kraton Performance Polymers, Inc., a global producer of highly-engineered polymers, today announced that it has entered into a definitive agreement to combine with the styrenic block copolymer ("SBC") operations of Taiwan-based LCY Chemical Corp. ("LCY"). The transaction will combine Kraton's broad product portfolio and innovation platform with LCY's cost-effective and innovative SBC operations and its proven record of driving growth in China and broader Asia.
The combination agreement calls for LCY to contribute its SBC business in exchange for newly issued shares in the combined company, such that Kraton's shareholders and LCY will each own 50% of the outstanding shares of the combined enterprise. The combined company will be incorporated in the UK, will be listed on the NYSE, and will be led by Kevin M. Fogarty, Kraton's President and Chief Executive Officer, and a global management team with administrative headquarters located in Houston, Texas.
"This combination addresses the strategic objectives of both Kraton and LCY. For Kraton, it represents a logical next step in our ongoing strategy to reposition our manufacturing assets, providing for significant improvements in overall cost structure, and furthering our investments in Asia, thereby increasing our participation in the fast-growing markets of China, and Asia Pacific more generally. Moreover, the combined company's capital structure, financial flexibility and cash-flow profile will serve as a strong foundation for continued investment in growth," said Kevin M. Fogarty, Kraton's President and Chief Executive Officer. "Kraton is an innovation company and our commitment to innovation, including our ongoing portfolio shift, will continue as the combined company focuses on accelerating growth in both its innovation portfolio and its core product offerings."
"LCY's SBC business, with its cost-effective operations and the strategic location of its manufacturing plants, including its recently expanded 300 kiloton plant in Huizhou, China, has generated growth rates exceeding twice the average of the SBC industry. Operations of the combined company will benefit significantly from LCY's cost-effective process capabilities and strategic sourcing of raw materials in Asia," added Fogarty. "We expect the combination to result in synergies of $65 million on a run-rate basis by 2017, which will be achieved through fixed-cost rationalization, optimization of variable-costs and through reductions in overhead costs. We estimate we will incur costs totaling approximately $70 million in the next three years to achieve these synergies. We also expect the combination to be accretive on an operating basis by $0.75 - $0.80 in the first full year of combined operations."
"Through the leadership of Bowei Lee, Chairman and Chief Executive Officer of LCY, LCY has established an impressive track record for profitable growth in its SBC operations. We feel that LCY's market presence in Asia and the cost effectiveness of its manufacturing operations provide a strong complement to the innovation focus and portfolio breadth of Kraton," said Dan Smith, Chairman of Kraton's Board of Directors. "The combination of Kraton and LCY's SBC business will result in a company with extensive capabilities and will establish a platform for continued innovation and profitable growth that will benefit Kraton's shareholders, its customers and employees," Smith added. "With one-third of pro forma revenues coming from China and greater Asia, the combined company will be geographically balanced across its three regions – the Americas, Europe and Asia – and well-positioned to serve customers around the world with an industry-leading platform of innovation-grade products."
"The combination agreement between the parties addresses the strategic objectives for both LCY and Kraton and allows the combined company to develop and manufacture more innovative products for broader applications in a cost efficient manner. The combination of LCY's innovative SBC manufacturing technology and geographic focus in higher growth markets with Kraton's leading R&D resources will make the new company a leading global player in SBC's. Projected synergies are expected to be achieved within three years, creating significant value for the combined company, shareholders and employees, as well as continuing to promote Taiwan's petrochemical industry as an important force on the international stage," said Bowei Lee, Chairman and Chief Executive Officer of LCY.
The new combined company will be a public limited company under the laws of England to enhance the financial flexibility of the global enterprise. The combined company will establish a registered office in England, and will maintain administrative headquarters in Houston, Texas. At the closing of the transaction, Kraton, as well as the entities owning LCY's SBC business will become subsidiaries of the combined company. The current shareholders of Kraton will exchange their shares on a one-for-one basis for shares in the combined company. At closing, Kraton's shareholders will own 50% of the shares of the combined company, and LCY will own the other 50%. The stock of the combined company will be listed and traded on the NYSE, and the company will continue to report earnings and financial results on a dollar-denominated basis in accordance with U.S. SEC rules.
Pursuant to a shareholder agreement to be entered into at closing setting forth governance rights and limitations relating to LCY's ownership, the Board of Directors of the combined company will consist of 14 directors, with seven of Kraton's ten current directors continuing to serve as directors of the combined company. LCY will designate seven directors to the combined company's Board. Dan Smith, who serves as Chairman of the Board of Directors of Kraton, will become Chairman of the combined company's Board for a period of two years post-close, after which, the LCY designees on the combined company Board will select the Chairman for a period of two years. Thereafter the Chairman will be selected by the full Board.
LCY's SBC operations are expected to be contributed on a cash free, debt-free basis, such that upon closing, long-term debt of the combined company is expected to be essentially unchanged from that of Kraton and therefore the combined leverage ratio is expected to decline to less than 1.5 turns in the first year.
The Board of Directors of LCY has also approved the definitive agreement to combine LCY's SBC operations with Kraton. The combination is subject to the approval of Kraton's and LCY's shareholders; U.S., Taiwan, China and Turkey regulatory approvals; and other customary regulatory and other approvals and conditions. The transaction is currently expected to close in the fourth quarter 2014, subject to the timing of necessary regulatory approvals. Kraton intends to file a proxy statement/prospectus with the U.S. Securities and Exchange Commission relating to the transaction as promptly as practicable.
Lazard is acting as Kraton's financial advisor and Kraton's legal advisor is Baker Botts L.L.P. Citi is acting as LCY's financial advisor, and LCY's legal advisor is Skadden, Arps, Slate, Meagher & Flom LLP.
CONFERENCE CALL AND WEBCAST
Kraton has scheduled a conference call and webcast on Tuesday, January 28, 2014 at 9:00 a.m. (Eastern Time) to discuss the combination with LCY. Kraton invites you to listen to the conference call, which will be broadcast live over the internet at www.Kraton.com, by selecting the "Investor Relations" link at the top of the home page and then selecting "Events" from the Investor Relations menu on the Investor Relations page.
You may also listen to the conference call by telephone by contacting the conference call operator 5 to 10 minutes prior to the scheduled start time and asking for the "Kraton Conference Call – Passcode: "Kraton" U.S./Canada dial-in 800-857-9641. International dial-in #: 415-228-4971. Copies of the presentation material that will be reviewed during the call are available on the company's website at www.Kraton.com.
Source: http://www.kraton.com/