Hexion Holdings Announces Plan To Separate Into Two Independent Companies

Deal Overview

On September 29, 2021, Hexion Holdings Corporation (OTC US: HXOH, $22.20, Market Capitalization: $1.3 billion) announced its plan to separate into two independent companies. The two companies will be “Hexion Holdings,” comprising of the Adhesives and Versatic Acids™ and Derivatives product lines, and “Hexion Coatings and Composites (U.S.) Inc.” (“Epoxy”), consisting of the company’s epoxy-based Coatings and Composites products. Hexion expects that the “Epoxy” separation transaction will be in the form of a distribution of 100% of the stock of Epoxy, a new and independent company, to current holders of Hexion Holdings common stock and warrants. Upon completing the Epoxy spin, current Hexion Holdings shareholders will own shares of both Hexion Holdings and Epoxy. Hexion Holdings also fi led a registration statement on Form S-1 with the U.S. Securities and Exchange Commission for a proposed initial public offering of Hexion Holdings (Stub) under the symbol “HXN” on the New York Stock Exchange. Before the consummation of this common stock offering, Hexion Holdings will distribute to its existing stockholders and warrant holders all of the common stock of “Epoxy”. Thereby, investors who purchase shares of the common stock in the offering will not be entitled to participate in the distribution of Epoxy shares due to such purchase and will not receive any interest in the Epoxy Business. The Epoxy separation transaction is currently targeted to be completed in the fourth quarter of 2021, subject to final approval by the Board of Directors, customary regulatory approvals and tax and legal considerations. The financial terms of the separation, including the new indebtedness expected to be incurred by Hexion and Epoxy, will be determined by Hexion Holdings’ Board of Directors based on a variety of factors, including establishing an appropriate pro forma capitalization for Epoxy as a standalone company and the level of indebtedness relative to earnings of various comparable companies. Moelis & Company LLC and Morgan Stanley & CoMS. LLC serve as strategic advisors in connection with the strategic review. Paul, Weiss, Rifkind, Wharton & Garrison LLP and Davis Polk & Wardwell LLP are serving as an offering and M&A counsel to Hexion.

Hexion Holdings and Epoxy are expected to enter into a Shared Services Agreement, which will enable Hexion Holdings to provide to Epoxy, on a transitional basis, certain services or functions that the companies historically have shared and one or more commercial agreements relating to the ownership, management, maintenance, support, and use of certain shared operations services by Hexion Holdings to Epoxy. Post-spin-off, Craig Rogerson will continue to lead Hexion Holdings as Chairman, President and Chief Executive Officer. George Knight will continue in his role at Hexion Holdings as Executive Vice President and Chief Financial Officer.

Ann Frederix, currently Senior Vice President, Coatings & Composites, Hexion Holdings, is expected to serve as Chief Executive Officer of Epoxy. Joost Vierhout currently Senior Finance Director, Global Epoxy and Versatics, Hexion Holdings, is expected to serve as Chief Financial Officer of Epoxy.

Deal Rationale

Since emerging from Chapter 11 bankruptcy in 3Q19, Hexion has been focused on streamlining its portfolio of businesses, investing in R&D and capacity to bring new value-added products to market. The company also completed the sale of its Phenolic Speciality Resin, Hexamine and European based Forest Products Resins businesses for approximately $425 million to Black Diamond and Investindustrial in 1Q21. With the recent strong performance, favorable end-market exposure and after a comprehensive evaluation of strategic actions aimed at unlocking the value of its businesses, Hexion’s Board and management team determined that it was the right time to pursue a separation through an IPO and spin-off. The listing of Hexion shares on NYSE is expected to enhance liquidity and drive valuation multiples. Hexion’s Board of Directors believes separating the Epoxy Business from other businesses is in the best interests of Hexion and its stockholders and has concluded that the separation will provide Hexion Holdings and Hexion Coatings and Composites (Epoxy) with several potential opportunities and benefits, including strategic & management focus, resource allocation & capital deployment, investor choice and employee incentives & retention.

The separation will enable each company’s management team to better position its businesses to capitalize on macroeconomic trends, increase managerial focus to pursue its strategies and leverage its key strengths to drive performance. The management of each company will be able to concentrate on its core competencies and growth opportunities. It will increase flexibility and speed to design and implement strategies based on the characteristics of its business. The separation will enable each company’s management team to implement a capital structure, dividend policy and growth strategy tailored to each unique business. Both firms are expected to directly access the debt and equity capital markets to fund their respective growth strategies. The separation into two distinct entities provide investors, both current and prospective, with the ability to value the two companies based on their distinct business characteristics and make more targeted investment decisions based on those characteristics. Also, the spin-off will enable each company to better incentivize, attract, and retain key employees through equity compensation. Separating the two businesses will allow each company to design stock options and similar programs that better incentivize management to enhance business performance because the stock price performance of each company will be based on the performance of its business.

Post-spin-off, Hexion Holdings will consist of the company’s existing Adhesives and Versatic Acids™ and Derivatives product lines. Hexion Holdings will continue to build on its strong momentum, driven primarily by new solid residential construction and remodeling demand in North America, continued capacity expansion progress and gains from innovative new products, as well as the need for more sustainable building and coatings materials. As a standalone company, Hexion Holdings is expected to have favorable cash flow attributes and a more robust financial profile. Epoxy will consist of Hexion Holdings’ former base and specialty epoxy resins product lines. As a standalone company, Epoxy will have a greater ability to grow and expand its leadership position in attractive global markets.

Company Description

Hexion Holdings Corporation (Parent)

Based in Columbus, Ohio, Hexion Holdings Corporation (“Hexion Holdings”) is the indirect parent of Hexion Inc. (“Hexion”). Hexion is a global leader in thermoset resins. Hexion serves the global adhesive and industrial markets through a broad range of thermoset technologies, speciality products and technical support for customers in various applications and industries. Its products include a wide range of critical components and formulations used to impart valuable performance characteristics such as durability, gloss, heat resistance, adhesion and strength to its customers and their customers’ final products. The company’s products sold to its customers are highly value-added contributions to their final work product, even though they often represent only a small portion of the overall end-product cost. Hexion serves highly diversified growing end-markets such as residential and non residential construction, wind energy, industrial, automotive, consumer goods and electronics. In January 2020, the company changed its reporting segments to align its two growth platforms, Adhesives and Coatings & Composites. The adhesives segment produces construction and industrial adhesives and additives for energy and agricultural applications. In Coatings & Composites segment, the company has resins used in energy, aerospace and automotive, and other high-performance coatings applications. Hexion’s integrated manufacturing platform allows the company to supply its derivatives internally and sell excess material to the market. The company sells this excess material as Intermediates & Derivatives in the Adhesives segment and Base Chemicals in the Coatings & Composites segment. For FY20, the company generated net sales of $2.5 billion.

Hexion Coatings and Composites (U.S.) Inc. (Epoxy”) (Spin-off)

Hexion Coatings and Composites (U.S.) Inc. (Epoxy”) will be a leading producer of epoxy specialty resins, modifiers and curing agents in Europe and the United States with a global reach to its end markets, including other regions such as China and Latin America. Epoxy resins are the fundamental component of many types of materials and are often used in the automotive, construction, wind energy, aerospace and electronics industries due to their superior adhesion, strength and durability. The company’s position in basic epoxy resins, along with its technology and service expertise, has enabled it to offer formulated specialty products in specific markets. In composites, specialty epoxy products are used either as replacements for traditional materials such as metal, wood and ceramics or in applications where traditional materials do not meet demanding engineering specifications. With its senior management team based in Rotterdam, the Netherlands, Epoxy expects to maintain a significant global presence. Stafford, Texas, will serve as its primary U.S. office, and Epoxy will also maintain an executive office in Shanghai, China. In addition, Epoxy will continue to operate world scale epoxy plants in Pernis and Deer Park, Texas, and additional manufacturing operations in the United States, Germany, Spain and South Korea. For FY20, Epoxy generated total sales of approximately $1.1 billion.