Limited Value Creation in Celanese Deal
Narrow-moat Celanese (CE) announced plans to spin off its acetate tow business into a joint venture with Blackstone, which will contribute its recently acquired Rhodia Acetow business. Celanese will own 70% of the JV and would receive a $1.6 billion dividend payout as part of a recapitalization upon deal completion. We raise our fair value estimate to $63 per share from $62 based on the incremental cash flows from synergies and a 50% probability that the deal will close as planned.
This deal consists of the merger between the two companies into a JV, followed by a dividend recapitalization strategy, where the JV will raise $2.2 billion of largely non-recourse debt and dividend out the proceeds. Celanese and Blackstone will receive $1.6 billion and $600 million, respectively. Management plans to use $800 million of the dividend to reduce debt with the remainder going to share repurchases and growth initiatives. Although the market reacted positively, we’re skeptical of the long-term value created. This deal primarily changes the firm’s capital structure, which we view as value-neutral. In a JV transaction, value is created from synergies, or by one JV partner from an ownership stake that is greater than the value of contributed assets (at the expense of the partner).
We estimate roughly $1 per share of synergy value creation, but see the 70%/30% split as fair based on the revenue of the contributed acetate tow businesses. The combined company could achieve synergies from research and development and back office consolidation. Management declined to disclose specific synergy estimates and instead listed synergy categories. Given that each business already has meaningful global market share, we’re skeptical of procurement synergies from larger volume purchases. The only guidance management provided was an EPS accretion target of $0.50-0.75 per share by the third year after the deal closed. We think accretion would primarily be driven by share repurchases.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.
