Huntsman power battle escalates, with activist investor Starboard upping the stakes

A power struggle escalates at Huntsman Corp., the Houston-area chemical company run by the prominent family of the same name.

Allegations of underperformance and mismanagement are at the heart of a proxy fight launched this month by Starboard Value, a well-known New York hedge fund and activist investor that is rallying Huntsman shareholders to vote. for four of its board nominees at the company’s annual meeting. in March.

The notoriously aggressive Starboard, which has won seats at companies including Yahoo, eBay and Papa John’s, set the stage last year for a proxy battle at publicly traded Huntsman by bolstering its stake. He owns nearly 9% of The Woodlands-based company, analysts said. Managing Director Peter Huntsman and the family’s JK Huntsman Foundation together own 8.1%.

The potential board reshuffle comes as the chemicals giant struggles to reposition its portfolio as demand for its key products shifts.

Change, however, is not happening fast enough for Starboard, which criticizes Huntsman’s directors for allowing the company to fall short of its profit potential.

The company has its roots in Huntsman Container Corp., founded in 1970 by Jon Huntsman Sr. and his brother Blaine, who saw an opportunity to create containers for the burgeoning fast food industry. The company’s breakthrough product was the clamshell container, created in 1974, for McDonald’s Big Mac.

The Huntsman Chemical Corp. was established in 1982 in Salt Lake City and in 1994 became the Huntsman Corp., with Peter R. Huntsman as CEO.

The company went public in 2005.

Peter Huntsman’s older brother, Jon Jr., is a former governor of Utah who served as ambassador to China from 2009 to 2011 under President Barack Obama and ambassador to Russia from 2017 to 2019 under the Trump administration.

“Unfortunately, we believe the board has presided over years of poor operating performance, missed financial targets and broken promises,” Starboard wrote in filings with the Securities and Exchange Commission, noting several failed attempts by the company to meet its own performance targets.

The contest comes as Huntsman rebounds from the hits suffered earlier in the pandemic, when uncertainty suppressed demand for goods, including its products such as polyurethanes used in foams, insulation, textiles and manufacturing automobile. Yet the specialty chemicals producer nearly doubled its profits in 2020 – a year marked by the historic oil crash and the economic fallout from the pandemic. Profits jumped to $1.03 billion from $562 million in 2019, even as revenue fell 11% to $6.02 billion from $6.8 billion.

Huntsman continued to rebound in the third quarter, when it made $209 million, up from $48 million in the same period a year earlier. Revenue rose to $2.29 billion, a 53% increase from $1.51 billion in the third quarter of 2020. The company is expected to report fourth quarter results next month.

“We are deeply disappointed that Starboard is forcing Huntsman and its shareholders to bear the cost and distraction of an unnecessary proxy fight,” the company said in a statement. “Starboard is more concerned with installing its hand-picked candidates on the Huntsman Board of Directors than enabling the Board and management team to create shareholder value, through our multiple initiatives. backed by Starboard.”

Starboard’s contest isn’t the first Huntsman has faced. A dramatic tussle with activist investors in its potential merger target, Clariant, scuttled those plans in 2017. Opponents of the $15 billion chemicals deal argued at the time that the merger with Huntsman would dilute the value of Clariant.

Analysts acknowledged that Huntsman lagged some of its peers and noted that Starboard’s attempted overhaul was unsurprising given recent board activism in the chemical sector.

Huntsman lags behind its chemical counterparts Eastman Chemical Co. and Celanese Corp. in terms of profitability, Morgan Stanley analyst Angel Castillo said in a Jan. 14 research note, citing an estimated 2.5% gap in cost savings — or more than $200 million — between Huntsman and the pair. Huntsman also trails Eastman and Celanese in free cash flow conversion targets, Castillo wrote, noting that “this leaves even more to be desired compared to best-in-class peers with a similar portfolio composition.”

Analysts, however, said Huntsman is working to improve its portfolio and its investor relations. Castillo noted the possible sale of its textile effects segment, a new compensation plan that ties executive compensation to financial goals and a new billion-dollar stock buyback program. He and other analysts spoke favorably of Starboard’s top contender, James Gallogly, a former chief executive of LyondellBasell who in 2009 helped bail the rival chemicals company out of bankruptcy.

“Over the next five years, Mr. Gallogly engineered the transformation of LyondellBasell from a company in disarray to one that is now widely regarded as one of the best operators of chemical assets in the world,” said Castillo said in the note. “It should be noted that the restructuring that took place at LyondellBasell was primarily focused on embedding a culture of profitability and capital discipline.”

Starboard nominees also include Sandra Beach Lin, retired CEO of solar silicon company Calisolar; Susan Schnabel, co-founder of aPriori Capital Partners, a New York investment firm; and Jeffrey Smith, CEO of Starboard.

Huntsman’s board of directors has remained virtually unchanged in the 17 years since the company went public, Starboard said. The company named three new board members this month just before the proxy threat hit.

Chairman of the Board, Peter Huntsman, meanwhile assumed the title in 2018, just before the death of his father and company founder, Jon Huntsman Sr. Peter Huntsman has held various positions in the company since 1983. He has transformed the company since becoming President and CEO. in 2000, eliminating units that made low-margin commodity chemicals such as ethylene oxide, which is used in antifreeze and as a pesticide. The company sold its Port Neches chemical plant to Thai-based Indorama Ventures in January 2020 in a $2 billion deal that also included its chemical intermediates and surfactants business.

Starboard’s problem with the company has more to do with tracking than vision, which the parties are aligned to, he said in filings. “However, we hope the board will recognize that it is not a lack of aspiration, but a lack of execution, that has historically frustrated shareholders.”

Frank Mitsch, an analyst at Fermium Research, said there might be room for compromise. He recalled a gruesome proxy battle that landed Starboard nominee Gallogly on the board of Delaware chemical giant DuPont.

“It was a long proxy battle that left a lot of scars,” he said. “The hope is that we avoid that in this case.”

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