Kraton Performance Polymers is at least temporarily stepping back from plans to merge with Taiwanese rival LCY Chemical Corp.

The Houston, Texas-based manufacturer of styrenic block copolymers (SBC) said it has notified its potential partner that its board of directors intends to withdraw its recommendation that Kraton shareholders approve the combination agreement signed at the end of January 2014.

Observers now expect the deal, initially scheduled to close in the fourth quarter of this year, to be renegotiated. If successful, it would create a leading worldwide manufacturer of SBC with more than $2 billion in annual sales.

Explaining the rethink, Kraton pointed to declines in the operating results of the LCY's SBC activities in the 2014 first quarter as well as the deterioration in its full-year outlook. It also cited a decline in its own share price and negative reactions from shareholders following its management's announcement on 24 June that the merger could take two years longer to pay off than originally expected.

SBC is the largest of LCY's seven business units, last reporting annual sales of $612 million. In the first quarter of this year, EBITDA fell to just below $3 million, and reports said the second quarter was not expected to show improvement.

If requested by LCY,  during the five-day notice period Kraton will be obliged to negotiate in good faith with the Taiwan company regarding any revisions or adjustments proposed by LCY to the terms and conditions of the agreement that would enable its board to continue to recommend the share transfer.

The combination agreement will remain in effect unless and until it is terminated in accordance with its terms, Kraton said. It added that it does not intend to make further public comment regarding the status of any negotiations

Analysts said they believed the deal still had has merit, but probably at a lower price.