Merger Favors Huntsman Sharesholders Over Clariant's

On May 22, Clariant and  Huntsman (HUN) announced that the companies would combine as a merger of equals. Given limited overlap between the companies, we see minimal anti-trust risk. Financial benefits are attractive, but we think the majority of value is accruing to Huntsman shareholders because the company is currently significantly overvalued, while Clariant is only moderately overvalued. Before the deal announcement, Huntsman traded at 1.9 times its fair value estimate while Clariant traded at 1.2 times its fair value estimate. Based on the value of the synergies, the planned split of ownership, and an 80% probability of closure, we are raising our Huntsman fair value estimate significantly, to $21 per share from $14, while Clariant’s fair value estimate rises only modestly, to CHF 18 per share from CHF 17. Neither of these companies has a moat, and we don’t expect that to change from this transaction.

The deal is structured as an all-stock merger of equals, with the new company named HuntsmanClariant. Huntsman shareholders will receive 1.2196 shares in HuntsmanClariant for each Huntsman share, while Clariant shares will be exchanged 1 for 1. This results in pro forma ownership of 52% Clariant and 48% Huntsman. The deal is expected to close by the end of 2017. We think the deal has a high probability of closing given limited overlap between the two businesses. The fact that closing is expected before year-end is strong evidence of the minimal anti-trust risk.

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