Will Solutia be the Solution for Eastman Chemical?
Today, Eastman Chemical (NYSE: EMN) announced that it would acquire Solutia (NYSE: SOA) for $3.4 billion in cash and stock. Solutia is a producer of chemicals for various products including electronic devices and tires. The company's business has a heavy focus in Asia, which accounted for 30% of its revenues in 2011. Solutia has forecasted significant growth in the region as China's demand for new products grows, and expects that business will grow by 33% by 2015. "The stock is cheap and business is getting better," stated Eric Green, managing partner at Penn Capital, in an interview with Reuters. "They are leveraged to the Chinese auto market which is continuously getting better."
Many analysts have rosy forecasts for China's petrochemical industry, with some projecting 20% annual growth for the next 10 years as China continues to make new investments in its infrastructure. The rise of the Chinese middle class consumer will also increase demand for nondiscretionary goods, as consumers look to spend on luxury goods and convenience items. Eastman Chemical hopes that the Solutia acquisition will help them to capitalize on rising demand for plastics and chemicals used in the production of industrial and consumer products.
Eastman Chemical voiced its faith in the Chinese market when it unveiled a new production facility in Heifei, China last month. The plant will become operational by the middle of 2013 and will make acetate tow, a material used in the production of cigarette filters and other tobacco products. Eastman hopes that the Solutia acquisition will help to broaden its product offering line towards industries that it had not entered in the past.
In a conference call with investors, Eastman CEO Jim Rogers stated that the acquisition would boost its earnings immediately. The company guided 2012 EPS at $5.00 per share for 2012 and raised its 2013 forecast to $6.00 per share. Eastman also stated that the merger would provide cost synergy and save nearly $100 million a year by the end of 2013. The deal is expected to close by the middle of 2012.
The Solutia acquisition was met with enthusiasm by Eastman Chemical investors, as the stock jumped more than 6% on the news. Eastman clearly believes that Solutia will dramatically increase its market share in the plastics and chemical industries, and allow them an additional path to the Chinese market. It is rare that a corporate acquisition allows all parties to benefit, but the initial reaction from Wall Street seems to indicate that this is one of the few that do.
If you believe that this acquisition is a positive indicator of where the plastics and chemicals industries are trending, consider these trades:
- Go long companies like Meadwestvaco (NYSE: MWV) or International Paper (NYSE: IP) which specialize in paper packaging products. These companies could benefit from increased demand in packaging for consumer products.
- Go long an ETF which holds chemical companies in its like portfolio, like the Materials Select ETF (NYSEARCA: XLB). These ETFs will see significant upside if their companies can take advantage of increased industrial demand in China.
If you believe that the economy is headed for a double dip recession and that the plastics and chemicals industries will suffer, consider these trades:
- Go short companies like Dow Chemical (NYSE: DOW) or DuPont (NYSE: DD) who specialize in the production of chemicals. Shares could trend downward if worldwide demand for chemicals falls.
- Go short an ETF which specializes in plastics of chemicals companies. These ETFs will suffer from downward pressure if these industries cannot generate increased demand for their products.
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