Indorama Ventures

Indorama Ventures Plc (IVL)

What’s new? Yesterday, IVL announced that it will buy from Northbrook Illinois-based Old World Industries LLC, its chemical assets in Clear Lake, Texas—Old World Industries I Ltd and Old World Transportation Ltd. The assets owned by the two firms include the largest single EO/EG production facility in the US with EO capacity of 435kta, MEG capacity of 358kta, DEG capacity of 64kta and TEG capacity of 6kta. IVL signed a definitive Purchase Agreement on February 6, 2012. Management expects the deal to close in 1Q12, subject to regulatory approval. The total acquisition value is US$795m and the sources of funds will be internal cash and loans.
Comment: We view the acquisition positively, as MEG is a key feedstock for PET resin and polyester fiber production. The deal represents backward integration within the polyester value chain. IVL could either use MEG from this facility internally or sell it outside. If the firm were to use it to supply captive demand, the expected cost saving would be about 10%. Note that the global MEG market is expected to tighten going forward. As such, IVL shouldn’t have any problem selling MEG outside and margin should remain good over the next few years, given expectations that the MEG industry utilization rate will rise. Note that the US MEG spread is US$100/t fatter than the Asian spread.
As Old World is an operating asset (its MEG capacity accounts for 9% of North American capacity), it is expected to start contributing profits in 1Q12 (in the case that IVL keeps the business as it is). Note that Old World generated US$567m in revenue and $158m in EBITDA last year.
The acquisition cost implies YE11 EV/EBITDA of 5x—a bargain compared to the global MEG player average YE11 EV/EBITDA of 9.9x. The financing for this acquisition will be debt:equity of 2:1. IVL should comfortably finance the deal, as it has available liquidity of US$1.1bn (cash and unused credit facilities). Our preliminary estimate suggests that cost-savings from the new assets (assuming IVL uses the MEG internally) will boost its long-term earnings by 3-4% and add another Bt2/share to our DCF valuation. The firm's net debt/equity ratio will remain comfortable at 0.7x (albeit, up from 0.5x at YE11).