This Late Billionaire's Most Interesting Holding

An upturn in TiO2 pricing could boost Kronos Worldwide, Huntsman Corp., or DuPont shares.

Jan 12, 2014 at 3:02PM

Renowned takeover artist and financier Harold Simmons passed away recently. Thanks to a savvy investing instinct, he was able to amass a multi-billion dollar empire during his life. One of his holdings included Kronos Worldwide (NYSE:KRO), a titanium dioxide, or TiO2, producer. Though the TiO2 industry has had its troubles, there are signs things may be turning around. If they do, Kronos, with competitors DuPont (NYSE:DD) and Huntsman Corp. (NYSE:HUN), could see its shares advance. Here's a quick look at a fascinating investor and one of his most interesting holdings.

Who was Harold Simmons?
Harold Simmons was a very successful investor who made a fortune by mastering the leveraged buyout, or buying a company with a small amount of equity and a significant amount of debt. The strategy can build wealth quickly when employed wisely. Simmons appeared to have the knack. Starting in 1960 with a single drugstore, he sold his then 100-property drugstore chain in 1973 for $50 million. Simmons multiplied that fortune as a feared participant in the debt-fueled merger and acquisition boom of the 1980's.

Mr. Simmons, estimated to be worth $8 billion in 2013, has owned or tried to acquire many businesses over the years, but one of his most notable raids was on defense contractor Lockheed Corporation in 1989. After Pentagon budget cuts depressed military contractor shares, Simmons gradually acquired almost 20% of the stock. Eyeing a $1.4 billion over-funded pension, many believed, the corporate raider withdrew only after Lockheed put up a stubborn poison-pill defense and won a hard fought proxy contest.

An astute investor, he described his stock picking style as "opportunistic" rather than proceeding by grand design. He also noted, "I look for value-financial and otherwise-that I feel has been overlooked by the market." Simmons also prudently avoided situations where he did not perceive an edge. "I try to stay away from regulated industries, and I try to stay away from high tech because I don't understand it," the financier stressed.

An interesting Simmons holding in a depressed industry
One of the most interesting Simmons-controlled companies is Kronos Worldwide, a leading global producer and marketer of TiO2. TiO2 is a vital coloring ingredient used in plastics, paints, and many other products. 2013 was an extremely difficult year for TiO2 producers. Product oversupply and sluggish demand caused selling prices to fall dramatically. Lower pricing, combined with a rise in raw material costs, obliterated industry profits. In its most recent quarter, Kronos reported a $29.9 million loss, compared with income of $35.2 million a year earlier. 

Kronos was not the only company to suffer. Chemicals industry giant DuPont, the world's largest TiO2 producer, found its titanium dioxide business to be depressing overall results. The company's TiO2 subsidiary, held in the performance chemicals division, was a notable laggard. DuPont reported a 5% year-over-year rise in operating earnings per share in its latest quarter with all company divisions producing sales and earnings improvements except performance chemicals. So, the subsequent plan to spin off the $7 billion segment wasn't too surprising. The split should help DuPont focus its substantial scientific expertise on secular growth markets like food, energy, and advanced materials, with shareholders ultimately benefiting.

The divestiture might help the TiO2 business as well. A leading player, DuPont Titanium Technologies, will have an incentive to help rationalize the industry. The firm's October product-pricing increase may be a sign of its intentions. Sustained higher selling prices are just what the industry needs to emerge from its slump. Kronos has also hinted that improved revenues may be on the horizon. It reported TiO2 selling prices decreased 18% year over year in the most recent quarter. A dismal figure, it was still a noticeable improvement over the 21% decline averaged over the first nine months of the year.

A stronger TiO2 industry on the horizon?
DuPont's impending departure from the industry also bodes well for further producer consolidation. Increased size, and the economies of scale it can deliver, may become a desired advantage -- at least Huntsman Corporation thinks so. A major chemicals producer, Huntsman expanded its TiO2 scope with the acquisition of Rockwood Holdings' titanium dioxide business. The $1.3 billion purchase makes Huntsman the second largest producer in the world, its goal being to integrate the acquisition, improve efficiencies, and eventually take the $3 billion entity public. Huntsman shareholders could benefit greatly if meaningful synergies are achieved and the TiO2 business environment improves.

Significant cost savings appear likely as Huntsman sees the transaction immediately boosting earnings per share. Industry recovery is also anticipated. Company management has stated that improved TiO2 sales are probable in the coming quarters. Huntsman is not alone in foreseeing better times. Though stressing he was committed to divesting the TiO2 operations, earlier this year Rockwood's CEO admitted that the business might be turning around. "We do believe that we are seeing a turnaround in our titanium dioxide cycle, and we expect the performance of this business to improve further in 2014," he mentioned.

Final thoughts
Harold Simmons was a very successful investor with an eye for value. One of his holdings, Kronos Worldwide has suffered due to a 2013 collapse in TiO2 pricing. There are some signs that things could be getting better, however. Though Kronos shares may have gotten ahead of themselves recently, investors may want to consider the company on any noticeable pullback. Improved supply and demand dynamics and a more consolidated, focused industry might provide for elevated TiO2 sales -- an occurrence that could propel Kronos, Huntsman or DuPont shares meaningfully higher.

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