Is Solstice Stock a Buy After the ESI Acquisition?

All right, everybody, we have another first. We're gonna be talking about Solstice, which was spun off from Honeywell in 2025. That was Honeywell's Advanced Materials Division. They fall into the base materials and gas suppliers there in the semiconductor supply chain. This is also a first for Element Solutions, and probably the last. Because they're getting acquired. Because they're getting acquired by Solstice. So let's talk about this. We have done some work, including a blog article on one of the peers to Solstice, and the new Solstice, that will also include Element Solutions once this merger is complete. Entegris, ENTG, which we wrote about, coming up on a year ago, and the stock has done pretty well as they recover with fab activity for their customers. So let's talk about these two companies, and a quick shout-out to the sponsor of today's video, fiscal.ai, which provides some great tools, including KPIs, key performance indicators, for companies like this. If you're trying to figure out what exactly it is they do to earn revenue. We're gonna take a look at these charts later, but you can make beautiful charts like this over at fiscal.ai, and you can get 15% off any paid plan with our unique link, fiscal.ai/csi, gets you that 15% off. Check it out now. They've been great partners to us and they power the data over at chipstockinvestor.com as well. Okay, let's take a little deep dive into this acquisition report from Solstice for Element Solutions. First, some of the high-level stuff. If the companies were combined today, they'd have about 6.8 billion, maybe after Q1 2026, more like closer to 7 billion in annual sales. And after they work through some synergies, basically eliminating redundant expenses between the two companies, they expect to have adjusted EBITDA profit margin of about 26%. The rationale for this though, really, besides just increasing profitability, is Solstice wants to broaden the scope of the base materials it is able to supply the electronics industry. We'll show you here in just a moment why that is, because there is a little bit of overlap between these two, but mostly Element Solutions provides things that Solstice does not. They did say, though, that in year one after the purchase, this will be accretive on an adjusted earnings per share basis, and the immediate goal, because Solstice has to take out a bit of debt, about four and a half billion in bridge loans have been lined up, the immediate goal is going to be unlocking profitability through those synergies and paying off that loan as quickly as possible. So if you happen to own Element Solutions, ticker symbol ESI, you'll get a chance to weigh in on this deal. But you're in line to get, for every share of ESI you own, $10 in cash and half a share of Solstice stock, which will put you in line to own about 44% of the newly combined company once finished. And Element Solution has been doing a bit of acquisitioning. Is that a word? Acquisitioning on their own. Acquiring? Acquiring is better because it's a real word, but I'm gonna go with acquisitioning. Okay. They've been doing some acquisitioning of their own. That's right. This was back in November of 2025. They announced that they were acquiring EFC Gases and Advanced Materials. It's just what it sounds like, another base materials company. They also had just announced that they were buying Micromax. That sounds fun. Yeah. Micromax. A segment of Celanese Corp. Ticker symbol CE. And Micromax, another very small little tuck-in acquisition, made specialty materials for the electronics industry as well, pastes and films and such. So Solstice is getting all of that. Plus ESI. Yeah. This is exciting. There's a lot of merger activity taking place. But this was kind of the idea. We saw this happen similarly after GE broke up into three companies. One of the rationales for this was split it in three, and each more focused segment can go out and do some industry consolidation of its own and create new little industrial conglomerates, but more focused industrial conglomerates. So this Honeywell spinoff of Solstice is now doing the same thing, and you can see where the revenue will be targeted after the companies have been merged. Let's start with ESI, which about 70% of its revenue comes from advanced packaging materials. So at every step of the manufacturing or electronics process, you have different chemicals involved. Advanced packaging is no exception to that. A bit of revenue from things like copper interconnects and other wafer development materials, thermal management for the chips themselves. Let's take a look at this chart from Fiscal on Element Solutions revenue breakdown. There you can see the assembly and packaging and circuitry and semiconductor solutions in the bars stacked on top of each other on the left. But in particular here, you'll notice they also have some materials and gases sales for industrial and energy markets, which is where they're going to get a little bit of overlap with the portfolio at Solstice. We'll come back to that in just a moment. And here's a look at the net income and free cash flow on a quarterly basis for ESI. This is since June 2023, and you can see the story is similar here as with Entegris. The downturn has been rather lengthy, and the free cash flow there in this most recent quarter is supply chain expansion, as well as those acquisitions that we just talked about. And here's a look at ESI's balance sheet. In blue, you have total cash and cash equivalents, which has been depleted a bit with those acquisitions. Long-term and current portion of long-term debt in the far right bar, orange and purple, also because of those acquisitions. This is not a super great position ESI was left in after those purchases they made at the tail end of 2025. I have to wonder if this is maybe one of the reasons they decided to just go ahead and merge with Solstice, and also one of the reasons why the market didn't initially react so well to this purchase. Solstice stock was actually doing quite well up until they announced this. They're purchasing an asset that is low on cash and the path to profitability could be a bit tenuous, but the upshot here is the entire electronics manufacturing supply chain is in high gear right now, and you have to think eventually at some point, there's going to be some sort of uplift in sales and profitability for these companies. Okay, now let's go back to this slide and take a look at the overlap again with Solstice and what Solstice is bringing to the table. Overlap with thermal chip management, and then Solstice is bringing data center cooling, uranium conversion, and nuclear services. That sounds exciting. They had to get those buzzwords in there for investors, but really actually the biggest revenue segment is refrigerants, data center cooling of various kinds. A lot of this is like good old-fashioned refrigerant used in air conditioning units to keep the whole data center cool using air. Or water. As in this AI-generated video that you're watching right now. Yikes. That is not what data center cooling systems actually look like, but. Thanks Adobe … but, this does kind of look like the cooling system on maybe, a high-end video game PC. So refrigerants does include that as well, not just air conditioning but also getting into liquid cooling. That's a very different set of chemicals needed for liquid cooling, like dielectric fluids. So in this revenue breakdown, that blue bar that you see is Solstice's refrigerants business. But a lot of other things going on here as well, including nuclear, as Kasey just mentioned, healthcare, a bit in electronics materials, aerospace and defense. They're really kind of all over the board, and so it suddenly makes sense why they would want ESI. If they see future growth potential in semiconductor and electronics manufacturing, that's not exactly Solstice's biggest moneymaker. So merging with ESI, get maybe a little bit of synergy bump, but also a lot of exposure to a new end market. Now, here's the same chart for Solstice net income and free cash flow. This is since their spinoff in the fourth quarter of 2025. They're in actually a much better position, I would say. Net income in green, free cash flow in yellow. They've weathered this quite well after they got spun off. And here's a look at Solstice's balance sheet. Total cash and long-term investments in the blue and purple bar, and then long-term debt in red. Is that long-term debt in red from this most recent acquisition? No, that would be long-term debt that Honeywell gifted them during the spinoff. You're welcome. Honeywell has actually been doing this to pretty good effect over the years as they have very slowly kind of whittled down the portfolio of companies. Some of our other CSI portfolio holding, I can think of at least one other CSI portfolio holdings from some years ago, that Honeywell also did this to. But at any rate, Solstice does have a little bit of existing debt. They're taking a bridge loan out and also assuming the debt of ESI. I would say that is basically the reason why the market reacted poorly, because Solstice's balance sheet on its own was quite manageable. Free cash flow positive, not an overwhelming amount of debt, enough cash on balance to weather some sort of future cyclical downturn, since these businesses that provide basic materials and gases tend to operate on really short cycles. But that is going to change after this acquisition is complete. Again, managing the debt is going to be priority number one, should this go through and the merger happen. They're essentially quadrupling their debt. But let's take a look at the expected total revenues for this company, this proposed new company, Solstice and ESI. In blue we have revenues for Solstice since 2023, and in pink for ESI. So projected in 2026, if this company does combine, the expected revenue is close to 8 billion. Currently, after a sell-off after this announcement, which I think is probably warranted, both companies combined have an enterprise value of roughly twenty-four billion. Enterprise value being market cap plus net debt that each of them has on balance. We should also add in the roughly four and a half billion that they're taking out in bridge loans to make this happen. Profitability appears to be a question mark at this point. If it does go through, the first year profitability might not be so great, but eventually could be pretty good. There's probably some much needed consolidation that needs to happen in this corner of the electronics manufacturing supply chain. Not necessarily something I think we would want to be invested in right this moment. But if they pull this off, Entegris has actually done a pretty good job of doing this over the years with lots of tuck-in acquisitions of smaller peers and helping them boost their growth and their profitability along the way. This is a pretty aggressive one, though, between these two businesses. We'll keep a close eye on it. Make sure you check out fiscal.ai/csi to get your fifteen percent off discount any paid plan. And make sure you check out this video that we did right here regarding our twenty twenty-six mid-year review. We take a look at all those memory stocks that have gone up quite crazy. Take care, everybody. See you again soon here at Chip Stock Investor.