We want to focus on the Huntsman strategic review of its Textile Effects business today, but in the context of the proposed management compensation program that was also discussed in today's release. If you are going to use total shareholder return (TSR) as a key factor in executive and senior management compensation (which is aligned with shareholder goals), then it must also be core to your corporate strategy. Every action or proposed action should be looked at through the lens of how it will align with the core strategic goal. Hunstman may be doing the right thing by looking to sell its Textile Effects business because it has a lower EBITDA margin than other businesses in the portfolio, but is this necessarily what a shareholder is looking for? In our experience, shareholders pay more for earnings certainly – so lack of volatility – and growth. Margins are important but margin improvement is only important if it impacts growth. Margins can be improved through divestment, but unless the divestment increases earnings certainty, and/or the growth rate of the remaining business, the divestment may have limited impact. That said, Huntsman is thinking about this correctly, and has been active in transforming its portfolio in the past – some might say too active – but we would not be in that camp. Compare this story with LyondellBasell, which has had the TSR component in its compensation scheme for years, but has not – in our view – managed the portfolio with that in mind. Acquisition and capital spending programs have in theory added to core EBITDA (not the case for the Bora JV in China today), but they have not done anything to address volatility, and investors are rightly questioning the cost of the growth – given the increased debt load. If LyondellBasell management was truly focused on TSR, the company should separate its much higher value compounding and licensing business from the core. See our past work on LyondellBasell
Our Sunday Thematic research a week ago (see linked report) discussed slowing growth investment in the traditional commodity chemical industry and suggested that ESG and climate pressures might slow investment even further. Yesterday, our Sunday Thematic made the argument that some of those dollars will target strategic M&A. We have recently seen an uptick in global chemicals sector M&A, and we find few items suggesting activity levels will slow in the near-to-medium term. In part, we think strategic M&A will be easier to get Board approval for than “new build” capacity additions, and it can be viewed as better use than holding cash or complementary to dividends and buybacks. Also, ESG and climate concerns could spur M&A activity, as companies look to separate bad emission assets from good ones – especially if the market values them very differently.