Westlake Chemical defies the skeptics
Vision and timing lead Houston company to a merger that’s proving its worth
In January 2016, with its stock price sliding, Houston’s Westlake Chemical Corp. made another move to acquire Axiall, its longcoveted rival in Atlanta. For the second time in four years, it surprised the smaller chemical maker with a hostile takeover bid, offering $2.9 billion, including the assumption of Axiall’s debt.
Axiall executives rejected the offer, and Westlake raised it to $3.1 billion. Another rejection and Westlake upped its bid to $3.8 billion, offering a 28 percent premium that Axial shareholders found too good to refuse.
Analysts and investors, however, panned the deal, questioning whether Westlake had overpaid and briefly sending the Houston company’s stock down further.
“It seemed like a fairly expensive price,” said Matthew Blair, a chemicals analyst at Houston energy investment bank Tudor, Pickering and Holt & Co.
Less than two years later, Westlake has proved the skeptics wrong. The company’s annual revenue jumped nearly 60 percent to about $8 billion in 2017, with much of that growth driven by the Axiall acquisition, and its profit tripled to $1.3 billion. Its share price has nearly doubled. Now, Blair said, “the deal is a just a total home run.”
Westlake’s success is the product of both vision and timing. Controlled by Houston’s billionaire Chao family, Westlake saw the merger with a competitor
“We grow by being focused on businesses we understand.” Albert Chao, Westlake Chemical CEO
that manufactured similar chemicals as a chance to vastly expand its production and markets. Meanwhile, as the Axiall acquisition more than doubled Westlake’s caustic soda production capacity, Europe implemented stricter environmental requirements that reduced production of the chemical, shrunk global supplies and drove up prices, creating export opportunities for Westlake.
“It all comes down to supplydemand fundamentals,” said Hassan Ahmed, a chemicals analyst with New York-based Alembic Global Advisors. “The timing has been great.”
Westlake is now one of the world’s largest producers of both the common plastic PVC and chlor-alkali products, which include chlorine and caustic soda. All are used in a range of building materials and consumer products needed to support a growing global population, particularly in emerging markets in Asia and elsewhere.
In addition, the merger allowed Westlake to cut costs by about $170 million last year while achieving record production in vinyls and plastics, its two main business segments. Albert Chao, Westlake’s chief executive, said combining the two companies has proceeded smoothly because they operated similarly.
“We’re seeing higher operating rates, higher reliability and the reduction of costs,” Chao said.
Westlake was founded by Chao’s father, T.T. Chao, who left China during the Communist revolution, fleeing to Taiwan. The company began with the elder Chao’s purchase of a Louisiana plant that made low-density polyethylene, one of the most common plastics, and had about 100 employees.
Westlake grew quickly, buying another plant in Calvert City, Ky., in 1990, then building or acquiring several other plants throughout the South over the next decade to produce both vinyls and plastics. It also acquired operations in China. In 2004, Westlake began selling shares on the New York Stock Exchange.
One of the company’s most substantial acquisitions came in 2014 with its purchase of German polyvinyl chloride manufacturer Vinnolit. Its affiliated business, Westlake Chemical Partners, also went public on the New York Stock Exchange that year. In May, Westlake, which employs about 8,800 worldwide, debuted on the Fortune 500 list at No. 352.
Like other chemical companies, Westlake is riding an American petrochemical boom, driven by cheap supplies of natural gas from U.S. shale fields and growing demand for plastics in developing countries, such as India and China, where middle classes are expanding rapidly.
Chao said Westlake sees particular opportunities in China, which recently stopped importing scrap plastic as part of an environmental crackdown that has curtailed the use of coal and shut down industrial polluters. The country now needs to import more plastics and petroleum products, which are produced at lower costs in the United States than Asia.
China accounted for less than 2 percent of Westlake’s sales last year, but Chao said he expects that share to rise as the company plans to export plastics and chemicals to meet the growing demand for packaging and other products in China.
“It’s the largest market in petrochemicals in many different plastics,” Chao said.
Through the Axiall purchase, which closed in September 2016, Westlake also acquired a 10 percent stake in a cracker, or processing plant, that turns the natural gas liquid ethane into ethylene, a chemical that is the building block for most plastics. The cracker is under construction near the company’s chlor-alkali plant in Lake Charles, La. The project, a joint venture with South Korea’s Lotte Chemical, is expected to begin operations in 2019 with the capacity to produce 2 billion pounds of ethylene per year, much of it destined for export.
The cracker will substantially expand Westlake’s plastics segment, which produces polyethylene and other materials for packaging and consumer products. Westlake has the option to purchase as much as 50 percent of the ethane cracker within the first three years of operation.
Chao considers the cracker an attractive investment for his company, which became the second-largest purchaser of ethylene in the U.S. after the Axiall acquisition. Analysts anticipate the cracker startup around the time that now-abundant ethlyene supplies begin to diminish, pushing prices up just as Westlake begins producing more ethylene through the joint venture.
Chao attributes the company’s success in part to its focus on its core products and operations. The company is working to increase production capacity at three of its chemical plants: two in Germany and one in Louisiana. The expansions, which will be competed in stages during the next three years, will boost output of the PVC and its base material, vinyl chloride monomer, as well as chlor-alkali products, used to make vinyls, glass, detergent, paper and other products.
“We grow by being focused on businesses we understand,” Chao said. “We believe the opportunity is significant on a global basis.”