Spin-off of North Charleston chemical business is complicated

WestRock CEO Steve Voorhees. File/Provided

At WestRock, breaking up is hard to do.

The packaging company and successor to MeadWestvaco Corp. is pushing back by several months the long-planned separation of Ingevity, its North Charleston-based chemical division. It cited tax issues and other “complexities” associated with the spin-off.

“We’re making progress on the spin of Ingevity,” WestRock CEO Steve Voorhees assured industry analysts during a Jan. 28 conference call.

As an example, he said, the company has received a private ruling from the Internal Revenue Service that “positively addressed each issue we needed to have addressed” to pull off the transaction.

The deal would add a stout newcomer to the Charleston region’s thin bench of publicly traded companies.

And every local WestRock stockholder — and plenty of them live in the Lowcountry because of MeadWestvaco’s long corporate ties to the area — would receive an undetermined pro-rated number of shares in the standalone chemical company.

“The long-term fundamentals of the business are sound, and will make for a compelling growth equity story,” Voorhees said.

Ingevity makes compounds used in printing inks, asphalt paving and adhesives. Customers include the agricultural, paper and petroleum industries. It also makes carbon powders that go into automotive emission systems and have applications in the air, water and food purification processes.

The plan to cut the business loose as an independent company has been in the works for more than a year, prompted in part by the urging of a vocal activist shareholder. MeadWestvaco announced the split in January 2015 — just weeks before it agreed to be sold to rival Rock-Tenn in a deal that created WestRock.

The combined companies chose to plow ahead with the spin-off of the former MWV Specialty Chemicals, which renamed itself Ingevity about five months ago as part of the planned transition.

An early stated goal was to complete the split by the end of 2015. The timeline was then pushed to March 31.

“We anticipate the completion of the spin by early May, later than previously announced, due to the inherent complexities of the separation process,” Voorhees said.

The timing isn’t as favorable as it once was. The U.S. stock market has been rocked by volatility in 2016, and Ingevity’s revenue for the October-December quarter fell by 13 percent to about $210 million from the same period a year earlier.

Voorhees attributed the $31 million sales slide to depressed oil prices, which cut into demand for certain chemicals.

“This has made competing petroleum-based chemistries more economical,” he said.

As a result of the deteriorating conditions, WestRock has slashed the value of its Virginia Avenue division by $478 million to $1.6 billion. The writedown was enough to push the parent company’s earnings into the red.

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With those factors in mind, an analyst on the late January earnings call asked Voorhees, “What’s the rush?” in pursuing the Ingevity spin-off now.

The CEO stuck to his guns.

“I’m glad you asked that question, because we’ve gone through and done a fair amount of thinking about that question ourselves,” Voorhees responded. “I start with we are a paper and packaging company. We’re not a specialty chemicals business, so the business does not really fit with our portfolio.”

He added that Ingevity has “a very strong management team, and the business is going to perform better on its own than it would be as part of WestRock.”

“I think you can go through the alternatives, and I think the spin makes the most sense,” he continued. “You could say, ‘Well, maybe I could look at some other alternatives.’ But we think this is for the shareholders, for WestRock ... the most effective thing for us to do. I think going to May is going to help the team get off to a good start, and they’re going to be able to put together, I think, a very compelling story for investors on the value of Ingevity.”

Contact John McDermott at 843-937-5572.