Cytec stripped of Coating Resins becomes takeout prey

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Cytec Industries (NYSE:CYT) will become an acquisition target if it divests its Coating Resins unit, several industry bankers told dealReporter. As such, the bankers said they believed the Woodland, New Jersey-based specialty chemical company may think twice about selling the entire unit.

On Cytec’s 3Q11 earnings call, CEO Shane Fleming said the company is reviewing all options for its Coating Resins business, a move that follows an April plan to restructure the division. Fleming said the company will provide a further update on its plans no later than its 4Q11 conference call. A spokesperson could not be reached for comment.

“If they are going to sell [Coating Resins], they’re going to get pretty small pretty quick. What do they do then?” said the first industry banker. Cytec expects Coating Resins to generate between USD 1.55bn and USD 1.58bn in net sales for full year 2011 and USD 57m to USD 60m in operating earnings out of total company sales of more than USD 3bn and operating earnings of USD 263m to USD 275m.

This news service previously reported that the jury was still out on what Cytec intends to do it with its Coating Resins business. It could not be learned whether the company retained a financial advisor for the effort, although none of the bankers interviewed had heard that a mandate had been handed out.

“I don’t think they’ve made any definite decisions yet on what they are going to do,” said Telly Zachariades, partner at chemicals specialist investment bank, The Valence Group. He said he did not believe the size of the company will ultimately determine what avenue Cytec decides to pursue for its Coating Resins unit, although it will be a factor for consideration.

Stripping Cytec of its Coating Resins unit makes it easier to draw a buyer, said the second banker, noting that it takes the company one step closer to being a pure play in the higher-margin composite business.

Cytec has four reportable business segments: Coating Resins, Additive Technologies, In Process Separation, and Engineered Materials. The Engineered Materials unit, which sells advanced composites, carbon fiber, structural film and pressure sensitive adhesives, and formulated resins, is expected to generate approximately 46% of operating earnings in 2011.

General Electric (NYSE:GE), Honeywell International (NYSE:HON) and 3M (NYSE:MMM) have looked at getting into composites in the past and could show interest in Cytec sans Coating Resins, said three of the bankers.

Engineered Materials has a comprehensive list of products and intellectual property, so “people who sell ... materials into aerospace could be interested,” according to one of these bankers. Although, a fourth banker said he believed a potential buyer would need to be “a real materials guy” that could take on the intricacies of the business, particularly as it relates to carbon fiber.

But whether Cytec would become an acquisition candidate depends largely on the kind of valuation the company would trade at once free of Coating Resins, said Zachariades. “If they trade at a healthy multiple it would not be vulnerable to a takeover, but if they don’t get the multiple pickup, the answer could be yes.”

Hexcel (NYSE:HXL), a pure-play advanced composites products manufacturer, trades at around 11.8x EV/EBITDA. Cytec trades at 5.8x EV/EBITDA, a reflection of the cyclically anchored and margin constricted Coating Resins unit, according to two of the bankers.

In the event of a full Coating Resin sale, the fourth banker said he believed Cytec would not trade too far off from Hexcel, noting that that the latter has long been able to remain an independent pure play. The remaining Cytec business could trade between 7x and 10x EBITDA if part or all of Coating Resins is divested, based on estimates by analysts Jefferies and Credit Suisse.

Another of the bankers argued that Hexcel’s independence could mean that “there’s not a lot of burning desire” for entering the composite acquisition, adding that it is unclear how big of an appetite there is for composites businesses.

Alternatively, Cytec could opt to hold on to the better performing parts of the Coating Resins unit, such as radiation-cured resins and water-borne resins, said two of the bankers. Keeping these pieces of Coating Resins could make Cytec a tougher target for any potential buyer interested in composites or aerospace adhesives, three bankers said. “I think it helps as a poison pill if they keep water [based resins],” the fourth banker said.

Cytec, which is incorporated in Delaware, does not currently have a shareholder rights plan in place. The company does, however, have a staggered board with three classes of directors. Its AGM was held in April of this year. Three directors are up for election in 2012.

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