Celanese Stock: Thoughts Post The DuPont Deal (NYSE:CE)

Celanese (CE) surprised its investors with a mega deal as it has reached an $11 billion transaction with DuPont (NYSE:DD) to acquire its Mobility & Materials business. As the deal is set to transform Celanese in a major way, let’s first look at the stand-alone operations, before making up thoughts on the impact of the deal with DuPont, as I have some reservations on the transaction as well.

The Own Business

Celanese is a global chemical and specialty materials company which generated $8.5 billion in sales in 2021. The company is active in three major product categories. The acetyl chain is the largest segment which generated $5.4 billion in sales last year on which it posted massive segment profits of $1.8 billion. This is a very diversified segment with this chemistry used in a variety of industries which includes food & agriculture, building & construction, medical and pharmaceutical applications, automotive, paper, industrial applications, etc.

This is complemented by a $2.7 billion engineered materials business which generated operating profits of $411 million and a minor acetate tow business which generated just half a billion in sales and minimal earnings.

The business was very profitable as it generated $2.8 billion in EBITDA on $8.5 billion in sales, a spectacular improvement from the 2020 results amidst dealmaking and a spectacular recovery in its end markets. This came as the core business generated just $5.7 billion in revenues in 2020 on which EBITDA just shy of a $1.5 billion was reported.

The company posted GAAP profits of $17 per share, with adjusted earnings coming in even a dollar higher. Net debt came in at $3.4 billion by year-end, translating into very modest leverage ratios.

With 112 million shares trading at $156 ahead of the deal announcement, the company supports a $17.5 billion equity valuation, or $21 billion enterprise valuation. This values the operations at around 2.5 times sales, around 7.5 times EBITDA and at just 8-9 times earnings. This comes after 2021 earnings obviously enjoyed a boom given the favorable market conditions.

Those conditions will not remain as rosy, as the company is battling with significant cost price inflation (as are its customers) including raging energy prices which are an issue for chemical businesses which tend to be energy intensive of course.

It is these demand concerns, rapid inflation, weakness in some key spot prices for Celanese which make investors hesitant to apply a 10 times earnings multiple here, indicating that investors clearly believe that current margins are not sustainable, as I have similar concerns.

A Huge Deal

With Celanese supporting a $21 billion enterprise valuation in mid-February, Celanese has announced a huge deal as it has reached an $11 billion cash deal to acquire DuPont’s Mobility & Materials business.

This business is a global producer of engineering thermoplastics and elastomers which are used in automotive, electrical, electronics, consumer goods and industrial applications. Leadership positions of this business are seen in nylons, specialty nylons, polyesters and elastomers.

The activities are set to generate $3.8 billion in sales in 2022, with the majority of sales generated from the automotive market. The unit employs 5,000 workers across 29 facilities and holds nearly a thousand patents.

With EBITDA seen at $900 million, the unit is quite profitable with 22% EBITDA margins. The $11 billion deal values the operations at 2.9 times forward sales and around 12 times EBITDA. This multiple should drop meaningfully as the company targets synergies of $450 million by 2026, which should lower the EBITDA multiple to 8 times, in line with the valuation of Celanese itself.

Moreover, synergies should provide a boost to the tune of $4 per share by 2026 with immediate accretion seen at half that number upon deal closure.

The Market Does Not Like It

Shares of Celanese fell $8, or about 5%, to $144 per share upon the deal announcement. With 112 million shares outstanding, the company lost nearly a billion in value in response to an $11 billion deal, arguably on the back of the higher 12 times stand-alone EBITDA multiple, while discounting the realization of very sizeable synergies.

Investors can only be happy that DuPont will retain (PFAS) liabilities related to the business as investors appear to be paying more and more attention to these kinds of liabilities (just look at 3M (MMM)).

Celanese ended the year with $3.4 billion in net debt by the end of the year as the all cash deal will result in a pro forma net debt load of $14.4 billion. With the own business set to generate $2.8 billion in EBITDA and this deal adding approximately $900 million in EBITDA, a combined EBITDA number of $3.7 billion works down to a 3.9 times leverage ratio.

This multiple drops to 3.5 times if we factor in the realization of synergies, but that will take some time of course. The company furthermore believes that leverage ratios should fall to below 3 times in two years time, which I agree with, yet this is needed if we believe that current EBITDA margins are very high already, as a reversal in profitability could easily create a dynamic in which leverage becomes quite high, perhaps too high.

With current earnings of $17 set to rise to $19 upon deal closure, and $21 per share after synergies are realized, valuations look very compelling at just 7-8 times earnings. This is of course before factoring in the high leverage situation and the fact that we are probably dealing with peak earnings in a tightening and inflationary environment.

What Now?

I am a bit uncertain about this deal as well. Celanese is paying quite a higher multiple for a business, as the rationale is backed by the expectation of high synergies, which are badly needed to translate into an EBITDA multiple which is in line with the own business. I have some concerns on this, as a $450 million synergy number is equal to nearly 12% of the acquired sales base.

This means that Celanese is paying a real premium to acquire the activities from DuPont, certainly as it appears that the materials and mobility business is more susceptible to rising input costs. Moreover, the current somewhat uncertain environment, in combination with (potential) peak current margins, makes it perhaps dangerous to put on too much leverage here. The lower multiple at which the stock trades and negative price reaction of the same stock to the deal announcement, makes it not a viable route to issue stock to finance the deal as well.

Concluding Thought

While Celanese has done just alright in 2021, I have some reservations about the timing of the deal as well as the structure. The full price being paid, aggressive synergy estimates, potential for a margin reversal in a tightening interest rate environment, while operating in an inflationary environment, makes me cautious on the timing of the deal as well.

Given all of this I understand why investors in Celanese are very cautious, as I do not see the current pullback necessarily as a huge buying opportunity yet, despite the roadmap for earnings per share to hit the $20 mark in the coming years, if end markets continue to see solid operating conditions.