[This Week's Industry Watch] Plastic Additive World's 2nd Largest Company, M&A Listings Spark Widespread Interest

Specialized producer of antioxidants known as plastic stabilizers
Ranks 2nd in global market share after Germany's BASF
Strong production competitiveness through economies of scale and vertical integration
Desired sale price around 840 billion KRW, double the current market cap based on 100% stake

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When a domestic petrochemical company was put up for sale through mergers and acquisitions (M&A), global private equity fund (PEF) managers and large corporations rushed to compete for the acquisition. The chemical company in the spotlight is Songwon Industrial, the world's second-largest manufacturer of plastic additives after BASF. Global PEFs such as The Carlyle Group, Kohlberg Kravis Roberts (KKR), Blackstone, Hillhouse Capital, and leading domestic conglomerates including LG Chem, Kumho Petrochemical, and Hanwha Solutions showed interest in acquiring this company.

The shortlist of qualified bidders in the recent preliminary bidding included five entities: KKR, U.S. PEF manager SI Capital Group, IMM Private Equity (PE), refining and petrochemical company S-OIL, and industrial machinery manufacturer Simpack. These prominent investors and companies have entered the competition to acquire Songwon Industrial, which may be somewhat unfamiliar to general investors.

Specialized Producer of Antioxidants Known as Plastic Stabilizers... Holds Second Largest Market Share After Germany's BASF

Songwon Industrial is a petrochemical company established in 1965. It was listed on the Korea Stock Exchange in 1977. The company primarily produces antioxidants among petrochemical products. Antioxidants are additives that prevent oxidation, which causes plastics to change shape or color when exposed to heat, cold, or light, and are known as plastic stabilizers. They are used to enhance the durability of automotive parts, electrical and electronic components, semiconductor circuits, and interior and exterior building materials. Songwon Industrial holds the second-largest market share globally in antioxidants, following Germany's BASF. After the 2008 global financial crisis, when competitors in Japan and the U.S. went bankrupt, Songwon Industrial absorbed a large number of personnel, increasing its market share. It is recognized for strong production competitiveness through economies of scale and vertical integration.

Songwon Industrial's business segments are broadly divided into industrial chemicals (antioxidants, fuel and lubricant additives, coatings) and functional chemicals (tin intermediates, PVC stabilizers, polyurethane, plasticizers, electrical and electronic chemical materials). Over the past three years, the industrial chemicals segment has accounted for more than 70% of sales. Sales by region are distributed as follows: domestic (18%), Asia-Pacific (28%), Europe (23%), Central Asia and Africa (6%), and North and South America (25%).

Annual Sales Exceed 1 Trillion KRW Last Year... Debt Ratio at 73.9% in Q1

Songwon Industrial surpassed 1 trillion KRW in annual sales last year. Sales over the past three years were 807.8 billion KRW in 2020, 998.2 billion KRW in 2021, and 1.3295 trillion KRW in 2022. Operating profit during the same period increased continuously, recording 68 billion KRW, 105.7 billion KRW, and 185.1 billion KRW respectively. Interest-bearing debt stood at 290.7 billion KRW as of the end of 2022, with a debt ratio of 78.33%. The debt ratio improved to 73.9% in the first quarter of 2023. The current ratio has shown an increasing trend over the past three years at 140.6%, 141.5%, and 168.5%, respectively, and remained healthy at 174% in Q1 2023.

Regarding Songwon Industrial's corporate governance, affiliated companies such as Songwon Trading (23.88%) and Kyungshin Industrial (9.15%), along with special related parties including Chairman Park Jong-ho (1.63%), hold a combined 36.65% stake. Songwon Trading, the largest shareholder of Songwon Industrial, is Chairman Park Jong-ho's personal company. Established in December 1979 as an unlisted company, it currently operates primarily in real estate leasing.

As of March, Songwon Industrial has 16 affiliated companies, including 13 consolidated subsidiaries, established through overseas business bases. It has secured local business bases in key global markets such as South Korea, Switzerland, Germany, the United States, China, Japan, India, and the United Arab Emirates. It owns manufacturing plants in South Korea, Germany, the United States, India, and the UAE. Although in a joint venture form, it also operates a plant in China. For its main product, antioxidants, it has an annual production capacity of approximately 320,000 tons based on domestic production, including raw materials. Vertical integration is established through in-house production of key raw materials for antioxidants such as isobutylene, alkylphenol, and alkylcresol.

The industry expects the total market size for antioxidants to grow annually by 9.4%, from 9.3 billion USD this year to 17.4 billion USD by 2030. Plastic production has increased approximately 245 times over the past 70 years. As of 2020, about 367 million tons of plastic were produced. The rapid increase in plastic usage has driven growth in petrochemical companies and expanded the plastic additives market. Recently, markets related to plastic recycling and eco-friendly materials have also been expanding.

In terms of competition in the plastic antioxidant market, Songwon Industrial holds about a 22% share globally. The leading group in the market consists of global chemical giants BASF, Songwon Industrial, Clariant, Evonik, and SK Capital, in that order. Domestically, Songwon Industrial occupies more than 60% of the market.

Efforts to diversify product lines are also evident. Over the past three years, Songwon Industrial has focused on developing basic raw materials (polymer materials) for the domestic semiconductor industry's material localization. Polymer development prioritizes customer-specific customization, and since 2021, the company has begun full-scale production of three types of polymers for photoresists. It has also transitioned to a stable production system for four types of ultra-high purity monomers (single-molecule materials) used in semiconductor processes. Additionally, pilot production has been completed for seven types of liquid monomers, two types of solid monomers, and two types of ultra-high purity additive compositions for photoresists, with evaluations completed by domestic and international customers.

The global petrochemical industry has shown periodic volatility roughly every ten years. Considering the petrochemical industry's cycle, the boom period lasted until 2021, and the downturn began in 2022. However, the downturn that started in 2019 was unusual due to the COVID-19 pandemic following the petrochemical boom from 2016 to 2018. Currently, the industry is seen as continuing the profitability decline that began in 2019. Accordingly, the downturn is expected to last from one year at the shortest to two to three years at the longest, followed by a recovery phase.

However, the economic development trend, a key driver of demand in the petrochemical industry, is slowing compared to the past, and China's economic growth rate continues to decelerate, which may cause demand growth in the regional petrochemical industry to differ from past trends. As of 2021, China accounts for over 50% of the total demand for major petrochemical products in the Asia-Pacific region. A slowdown in China's demand for petrochemical products could weaken supply and demand across the region. Although the downstream industry's downturn continues, some inhibiting factors are being resolved, and a general demand recovery is expected globally.

Goldman Sachs Appointed as Sale Advisor... 35.65% Stake Up for Sale

Meanwhile, Songwon Industrial has appointed Goldman Sachs as the lead advisor and is actively working on the sale of management rights. The sale target is approximately 35.65% of shares held by the owner family. An investment banking (IB) industry insider said, "The company is attractive due to its solid global market dominance as the world's second-largest player in the plastic additives sector after BASF," adding, "Currently, strategic investors (SIs) seem stronger than funds in the M&A competition." The seller reportedly wants to calculate the share value based on about 840 billion KRW, roughly twice the current market capitalization.