Company Reports

Olin reported solid second-quarter results, lifted in part by strong short-term pricing tied to the conflict in Iran. Its chlor-alkali products and vinyls segment declined year over year due in part to an unplanned outage in its vinyl chloride monomer plant, representing a 20% hit to EBITDA.

Olin serves many end markets, concentrating production around industrial manufacturing, construction, and small-arms ammunition. As the world's largest chlor-alkali producer, it manufactures caustic soda, chlorine, and hydrogen (collectively the electrochemical unit, or ECU). North America is heavily concentrated, with the top five producers controlling over three-fourths of the market; Olin alone accounts for roughly a third.

We are initiating coverage of Olin, the largest North American chlor-alkali producer, and Westlake, a large integrated producer of vinyl materials and building products. Coverage of Olin is prospective of the recently announced merger with Huntsman, creating OlinHuntsman.

Olin serves many distinct end markets, concentrating production around industrial manufacturing, construction, and small-arms ammunition. As the world's largest chlor-alkali producer, it manufactures caustic soda, chlorine, and hydrogen (collectively the electrochemical unit, or ECU). North America is heavily concentrated, with the top five producers controlling over three-quarters of the market; Olin alone accounts for roughly a third.

Major chlor alkali producer Olin OLN reported decent first-quarter results that we believe could represent a high-water mark for 2009. Sales amounted to $401 million, essentially flat with the year-ago quarter. Operating income climbed to $61 million from $52 million in the first quarter of 2008. The key driver of the firm's first-quarter performance was lofty chlor alkali prices, as average electro chemical unit prices reached $765 for the quarter--a historical high for the company. These high ECU prices helped offset the negative effects stemming from low operating rates, which sank to 65% for the quarter. However, we regard these favorable ECU prices as being untenable, as the travails of key caustic soda consumers in the paper and aluminum industries and cheap Chinese caustic imports have begun to drive down North American prices. Sliding ECU prices bode ill for other major chlor alkali suppliers in our coverage universe, including Westlake WLK, PPG PPG, and Georgia Gulf GGC.

By selling its unprofitable metals segment and augmenting its presence within the chlor-alkali chain through its 2007 acquisition of Pioneer, we believe Olin is taking a step in the right direction. However, the chlor-alkali industry is notoriously cyclical, with low barriers to entry and high exposure to volatile raw-material costs. We believe chlor-alkali prices are due for a fall as the current downturn saps demand for caustic soda, leading to an even tougher operating environment for Olin in the near future.

Having sold its metals business and beefed up its presence in the chlor-alkali market by acquiring Pioneer, Olin has transformed itself from an unwieldy conglomerate to one of North America's leading chlor-alkali producers. While near-term supply/demand fundamentals in this market appear favorable, low barriers to entry and volatile demand make it difficult for chlor-alkali producers like Olin to consistently create shareholder value over full economic cycles.

Having sold its metals business and beefed up its presence in the chlor-alkali market by acquiring Pioneer, Olin has transformed itself from an unwieldy conglomerate to one of North America's leading chlor-alkali producers. While near-term supply/demand fundamentals in this market appear favorable, low barriers to entry and volatile demand make it difficult for chlor-alkali producers like Olin to consistently create shareholder value over full economic cycles.

Having sold its metals business and beefed up its presence in the chlor-alkali market by acquiring Pioneer, Olin has transformed itself from an unwieldy conglomerate to one of North America's leading chlor-alkali producers. While near-term supply/demand fundamentals in this market appear favorable, low barriers to entry and volatile demand make it difficult for chlor-alkali producers like Olin to consistently create shareholder value over full economic cycles.

Having sold its metals business and beefed up its presence in the chlor-alkali market by acquiring Pioneer, Olin has transformed itself from an unwieldy conglomerate to one of North America's leading chlor-alkali producers. While near-term supply/demand fundamentals in this market appear favorable, low barriers to entry and volatile demand make it difficult for chlor-alkali producers like Olin to consistently create shareholder value over full economic cycles.

Having sold its metals business and beefed up its presence in the chlor-alkali market by acquiring Pioneer, Olin has transformed itself from an unwieldy conglomerate to one of North America's leading chlor-alkali producers. While near-term supply/demand fundamentals in this market appear favorable, low barriers to entry and volatile demand make it difficult for chlor-alkali producers like Olin to consistently create shareholder value over full economic cycles.

We are placing our fair value estimate for Olin OLN under review while we revisit our existing assumptions.

Having sold its metals business and beefed up its presence in the chlor-alkali market by acquiring Pioneer, Olin has transformed itself from an unwieldy conglomerate to one of North America's leading chlor-alkali producers. While near-term supply/demand fundamentals in this market appear favorable, low barriers to entry and volatile demand make it difficult for chlor-alkali producers like Olin to consistently create shareholder value over full economic cycles.

Olin OLN announced Monday that it will sell its metal operations to an affiliate of KPS Capital Partners for $400 million. The price tag represents a multiple of just over 4 times the business' 2006 operating income before depreciation and amortization. The metal segment had struggled mightily over the past few years, squeezed between the soaring cost of copper and nickel and sluggish demand stemming from weak end markets in the North American housing and automotive sectors. Metals accounted for two thirds of Olin's 2006 sales and nearly half its asset base and earned an average return on assets of just over 6% during the past two years. Given the stiff headwinds facing the division and its lack of synergies with Olin's core chlor alkali operations, we view this move favorably. However, we're not positive that the firm got the best price it could for its shareholders. We are placing our fair value estimate under review as we take a closer look at the economics of the deal.