The titanium dioxide industry has been a punching bag for Wall Street all year long -- and the market just landed another left hook today.
Shares of Tronox (NYSE:TROX) lost over 35% this morning after the company announced an 11th-hour pitch to salvage its proposed acquisition of Saudi Arabia-based peer Cristal. The news was actually handed down after the stock market closed on Dec. 4, but since the stock market was closed on Dec. 5 to observe the passing of President George H.W. Bush, today is the first day investors had to react to the news.
Tronox is facing a deadline of Dec. 19 to gain U.S. regulatory approval, so giving investors one less day to react isn't exactly helping. Considering multiple other pitches have been rebuked by regulators, analysts aren't confident this Hail Mary will work, either.
The company's peers aren't happy about the whole debacle, as they've been dragged down by association throughout 2018, and once again today. Venator Materials (NYSE:VNTR) fell as much as 16% today, while Kronos Worldwide (NYSE:KRO) dropped nearly 10%. Even diversified peer Chemours (NYSE:CC) fell over 7%. All four titanium dioxide stocks hit new 52-week lows today, although each has recovered some ground. As of 1:29 p.m. EST, Tronox stock had settled to a 23.8% loss.
Tronox has been trying to acquire Cristal since 2017, but despite gaining all necessary regulatory approvals internationally, the merger has been fiercely challenged by the Federal Trade Commission (FTC) of the United States. The North American market is currently dominated by Tronox, Cristal, Venator Materials, Kronos Worldwide, and Chemours. The FTC argues that further concentrating market power would hinder competitiveness and pose unacceptable economic risks, considering titanium dioxide is an important pigment used in paints, coatings, foods, personal care products, and other staple goods.
The spat between Tronox and the FTC is currently being mediated by an administrative law judge, who has until Dec. 19 to make a final decision about whether or not the U.S. regulator can nix the merger. Due to certain laws, Tronox cannot approach the FTC directly to negotiate, but first has to ask the judge for permission. The most recent press release announced that it filed a motion to do just that, but the company also included the pitch it wants to make to regulators.
To satisfy the FTC and gain approval for the merger, Tronox says it will sell the North American assets of Cristal to INEOS Enterprises, one of the world's leading chemical manufacturers and distributors. Since INEOS Enterprises has no titanium dioxide business today, it would be a new market entrant, thus keeping the current concentration of power in the market intact.
The proposed remedy would sell the titanium dioxide complex in Ashtabula, Ohio to INEOS Enterprises for $700 million. It was previously offered to Venator Materials for $1.1 billion -- Venator is desperately trying to increase production after losing its Pori, Finland facility to a fire -- but the deal didn't appease the FTC. Tronox would retain Cristal's international portfolio.
Tronox also disclosed that staff at the FTC indicated they would not recommend the divestiture to INEOS Enterprises to the FTC commissioners. If the regulator is concerned with market competitiveness, then that admission seems a bit odd. Either way, analysts are interpreting it as a sign the merger will not be approved, or that things could get uglier still.
The stock market hates uncertainty. Unfortunately, there's a big, dark cloud of it hanging over the titanium dioxide industry right now.
Whether or not the Tronox and Cristal merger is approved by the FTC, the market fundamentals for titanium dioxide actually remain quite strong in each major region. There's always a seasonal slowdown in the fourth quarter of the year, but demand is expected to outpace supply in China and North America in early 2019. That bodes well for strong selling prices or even continued price increases.
Therefore, on the whole, the titanium dioxide industry may be worth considering for long-term investors. Tronox is riskier due to the merger uncertainty. Similarly, Venator Materials is working through issues related to its Pori facility, while Chemours has significant environmental liabilities to consider. That leaves Kronos Worldwide, which actually appears to be a bargain stock this month.