Huntsman vs. the $3 Billion Saboteurs

(Bloomberg Gadfly) -- It's quite an achievement for two companies to unveil a deal with $3 billion of touted financial benefits that sends both their share prices lower. That's been the reaction so far to the planned union of Huntsman Corp and Clariant AG, the U.S. and Swiss specialty chemicals groups hoping to join forces and stay standing as the industry consolidates.

The duo were worth a combined $13.5 billion before they announced a "merger of equals" on Monday. On Wednesday morning that had fallen to $13 billion. The deal benefits are worth more than 20 percent on each share, yet both the stocks are below their pre-deal level. There's no premium being paid to either side, no cash is leaving either business. It should all be upside.

Huntsman vs. the $3 Billion Saboteurs

Why the bad reaction? Perhaps the deal has dampened hopes of either company being taken over at a fat premium. The transaction plan includes a $210 million break fee. It's also backed by family shareholders in both groups. Huntsman's core holdings are particularly concentrated. These are deterrents -- albeit not large -- to counter-bids. 

The other problem is timing. Huntsman trades on a lower multiple than Clariant and the deal terms lock this in. The aspires to trade on its Swiss peer's multiple and had a plan to get there: a flotation of its Venator Materials unit. The IPO will still go ahead despite the merger agreement and might attract more dedicated investors, boosting the share price. That would be shared with Clariant.

Huntsman's stock implies an enterprise value of 7.3 times forward Ebitda. If it traded on Clariant's 9.1 times, the shares would be about $37 -- $10 higher than Friday's level. The valuation shortfall reflects differing consumer exposure and vulnerability to the chemicals cycle, which cap the potential for completely closing the gap. Still, the synergies in the Clariant deal are worth about $6 a Huntsman share.

Huntsman vs. the $3 Billion Saboteurs

It might have been better for Huntsman to wait for the IPO to be done, use the proceeds to cut its debt, enjoy the valuation boost and then pursue a deal.

The snag is that the market capitalizations of the two companies have aligned recently, allowing them to be crunched together on a near 50:50 ownership split. That's been a catalyst for many a deal. No need for awkward negotiations on price or board roles. Even the name here is a fudge: HuntsmanClariant.

The two sides have been contemplating a deal for years, so it's not hard to see why they felt now was the time. When market capitalizations converge between industry peers, it's often the moment that brings everyone together. It might be better to take a cold shower.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

To contact the author of this story: Chris Hughes in London at