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M&As

Behind the scenes of DL Chemical’s unexpected $2.5 bn Kraton purchase

DL’s deep knowledge of Kraton and its quick decision to spend big money made the deal happen, analysts say

By Sep 30, 2021 (Gmt+09:00)

DL Chemical's plant in Brazil
DL Chemical's plant in Brazil

When DL Chemical Co. announced its $2.5 billion acquisition of US chemical manufacturer Kraton Corp. on Monday, it left many people bewildered.

The announcement came late at night in Seoul, not a good time for media attention. Also, the deal was apparently too big for the little-known Korean firm to make -- a transaction referred to by some as David’s conquest of Goliath.

Kraton's 2020 sales were $1.6 billion, more than double DL Chemical's 813.4 billion won ($686 million).

Industry watchers, however, say that the transaction was the right move for DL Chemical, a unit of Korea’s 18th-largest conglomerate DL Group, to leap forward as a global player.

“No company in the world would have known Kraton better than DL Chemical did. The Korean firm’s deep knowledge of Kraton’s situation and its quick decision to spend big money made the deal happen,” said an investment banking industry official close to the deal.

Talk of Kraton being up for grabs was brewing in the M&A market in June this year, when interested parties began looking into the possibility of taking over the Texas-based specialty chemical manufacturer.

By that time, DL Chemical was already close to its final decision to acquire Kraton with some executives opposing it, saying the price tag was too high.

But DL Chemical’s Vice Chairman and Chief Executive Kim Sang-woo and his supporters decided to push for the deal, knowing that the acquisition would put the company closer to its goal of becoming one of the world’s top 20 chemicals companies.

DL Chemical CEO and Vice Chairman Kim Sang-woo
DL Chemical CEO and Vice Chairman Kim Sang-woo

"We have been highly interested in Kraton's specialty polymer and bio-based chemical business, and this combination will allow us to provide our customers with a wider range of innovative products while also giving us the ability to serve a diverse range of end markets in over 70 countries worldwide," said Kim after the deal.

NO STRANGER TO KRATON

Kraton wasn’t new to DL Chemical.

In 2020, the Korean company purchased Singapore-based Cariflex Pte, a core unit of Kraton, for $530 million, in its first cross-border acquisition. Cariflex produces specialty synthetic rubber and latex used for medical materials such as surgical gloves and rubber stoppers.

Kraton’s stocks, which skidded to less than $10 a share last year from a high of $51 in 2018, started to rebound with growing demand for rubber gloves amid the spread of the Covid-19 pandemic. But Cariflex, the glove maker, was already in DL Chemical’s ownership.

Kraton was also reeling from its $1.37 billion acquisition of Arizona Chemical in 2016 as the addition of the company wasn’t creating as much synergy as desired, prompting Kraton’s shareholders to move to hold executives accountable for their poor management.

Kraton's Ohio plant
Kraton's Ohio plant

Industry officials say DL Chemical CEO Kim has known Kraton CEO Kevin M. Fogarty for years, which also paved the way for a smooth acquisition process.

Previously worked at BNP Paribas, SoftBank Korea and SK Telecom Co., Kim has been spearheading DL Chemical's business expansions since 2012.

On Monday, DL Chemical said it has signed a definitive agreement to buy 100% of the US-listed company in an all-cash deal for $2.5 billion, including $900 million in liabilities held by Kraton.

As a key unit of the petrochemical-to-construction conglomerate DL Group, DL Chemical, the world's largest producer of polybutene, aims to transform itself into a manufacturer of high-value specialty chemicals.

It controlled 23.3% of the world's polybutene (PB) market as of 2020. PB is a raw material of lubricants, adhesives and electrical insulators.

MAY RESELL KRATON’S PINE-BASED PRODUCT BUSINESS

Based in Houston, Kraton is a leading maker of specialty polymers, which are additives in high demand from the automotive, electronics, and semiconductors industries. Kraton is also the largest global provider of pine-based specialty products used for adhesives and road paving and tire materials.

The company has enjoyed a dominant position in the polymer market over the past 50 years. But hit by the pandemic-induced economic slowdown, Kraton swung to a consolidated net loss of $221.7 million in 2020, versus a net income of $55.8 million in 2019.

Kraton operates production facilities in 13 countries, including Germany, France, the Netherlands, Brazil and Japan, along with five R&D centers.

In 2020, DL Chemical acquired Singapore-based Cariflex from Kraton
In 2020, DL Chemical acquired Singapore-based Cariflex from Kraton

Since being spun off from DL Holdings earlier this year, DL Chemical has been looking for new growth drivers in the chemical sector. It is wholly owned by DL Holdings, formerly Daelim Industrial Co.

With more than 46 years of operational experience in the chemicals sector, DL Chemical also runs PolyMirae, a 50-50 polypropylene joint venture with the Netherlands-based LyondellBasell Industries. Polypropylene is used in automotive components and packaging films.

Analysts say DL Chemical may consider reselling Kraton’s business that makes pine-based specialty products, thought to be creating little synergy with DL’s current business portfolio.

Write to Jun-ho Cha at chacha@hankyung.com

In-Soo Nam edited this article.

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