24 March 2003 00:00 [Source: ICB Americas]With banks clamping down on financing and the equity market window slamming shut for public stock offerings, the chemical industry is starting to see the emergence of private investments in public equities (PIPEs). While private equity firms typically focus on acquiring noncore pieces of public companies, if share prices fall far enough or if companies find it tough to raise cash through traditional means, they may step in and take an equity stake to bail struggling companies out of tight liquidity situations.
"Stock prices of a number of companies have dropped to the point where it's possible to take them private, so I think going forward that will be a much more active market," says Harold Sorgenti, general partner at Sorgenti Investment Partners. "There have been some tremendous declines in the stock prices of chemical companies which makes them vulnerable to buyouts."
Wellman to Sell Stake
Wellman Inc., a $1 billion producer of polyethylene terephthalate (PET) and polyester fiber, in February signed an agreement to sell up to $125.4 million in convertible preferred stock and warrants to private equity investor Warburg Pincus LLC.
The proposed investment, which is subject to shareholder approval at Wellman's upcoming annual meeting, would give Warburg Pincus securities convertible into a 30 percent stake in the company, potentially rising to 49 percent over the next five years, according to Wellman's 14A proxy statement filed with the Securities and Exchange Commission on March 12.
Companies must seek shareholder approval to issue stock or securities convertible into shares representing 20 percent or more of their outstanding common shares.
Warburg Pincus has already purchased a $20 million convertible preferred note from Wellman, as well as warrants to buy 1.25 million shares of Wellman common stock at an exercise price of $11.25, marking its first-ever entry into the chemical industry since its inception in 1966. Shares of Wellman currently trade at their decade lows in the $9 range. Warburg Pincus already has one representative on Wellman's board of directors and is proposing to appoint another director as part of the deal.
Warburg Seeks More Deals
Warburg Pincus continues to scour the chemical landscape for acquisitions, armed with dry powder of $4 billion in its $5.3 billion Warburg Pincus Private Equity VIII global fund created in April 2002.
"We're looking at public and private opportunities in the chemical industry-both in commodities and specialties," says Oliver Goldstein, vice president at Warburg Pincus. "Chemical companies in need of financing, particularly in the small to midcap range, will certainly look to private sources as it becomes harder to tap the public markets."
Warburg Pincus had been eyeing the PET industry for over a year before being contacted by Wellman. "We like PET because of the stable 8 to 10 percent [volume] growth in the industry," says Mr. Goldstein. "There are a handful of players in the industry and Wellman is one with a strong market and cost position."
Investigation Hampers Wellman
For Wellman, the investment offers a chance for it to meaningfully reduce debt, which stood at $233.6 million at the end of 2002.
Wellman has been hampered in its refinancing efforts by tough market conditions as well as an ongoing investigation into the polyester staple fiber industry by the US Department of Justice since 2001.
"Although neither we nor any of our employees has been charged by any governmental authority with any wrongdoing, as a result of the on-going government investigation of pricing practices in the polyester staple fiber industry, our current ability to access the public capital markets is sharply curtailed," Wellman states in its filing.
"Management determined that refinancing solely with either senior bank debt or publicly-issued debt or equity was not feasible. In addition, they determined that it was not feasible to raise the amounts necessary in the private placement debt market or through asset sales," states Wellman. "Based in part on the advice of their advisors, management and the board concluded that the best course of action was to find a private equity investor."
Hired in April 2002, Wellman advisers JPMorgan, Bear Stearns and Fleet Securities conducted an auction process in which 20 potential private equity investors were approached. By October, three financial buyers submitted their offers and in February, Warburg Pincus emerged the winner.
The deal, which is contingent on Wellman obtaining a new $175 million credit facility to replace its existing $275 million line maturing in September, is likely to be moderately dilutive to Wellman's earnings. Assuming a conversion price of $11.25, Wellman's 2002 earnings would have been reduced from 83 cents per share to 63 cents, according to the company.
In the event shareholders shoot down the deal, Warburg Pincus will scale back its additional investment to $50 million in notes convertible at $11.25 per share.
Wellman faces the challenge of refinancing a significant amount of debt coming due over the next 18 months under difficult market conditions.
"Wellman's $275 million revolving credit facility, and its $80 million accounts receivable program, both mature in September 2003. Current borrowings under these facilities total approximately $83 million," notes Moody's Investors Service analyst David Neuhaus. "In addition, approaching debt maturities include $50 million of private placement debt due in February 2003, industrial revenue bonds of $10 million expected to be repaid in 2003, and the $150 million sale-leaseback transaction that matures in June 2004."
In January, Moody's downgraded Wellman's senior implied rating from "Baa3" to "Ba2," reflecting the weakening financial profile of PET resins and polyester fibers resulting from oncoming capacity additions and higher raw material costs.
Private Equity TakesMajority Stake in Hexcel
Hexcel Corp., an $850 million producer of advanced composites for the aerospace, electronics and other industries, is also fighting out of its liquidity crisis by selling $125 million in convertible preferred stock to a group of investors. Shareholders of Hexcel approved the deal in a special meeting last week.
Announced last December, the deal called for the issuance of convertible preferred stock to affiliates of Berkshire Partners LLC and Greenbriar Equity Group LLC for $77.9 million, and to Goldman Sachs for $47.1 million.
In December 2000, Goldman Sachs bought 14.5 million common shares of Hexcel from Ciba Specialty Chemicals for $11 per share, or $160 million, taking a 39 percent stake in the company. Hexcel's shares have since plunged to the $3 range.
With its participation in the deal, Goldman retains a 37.8 percent stake in Hexcel while Berkshire and Greenbriar gains 35.2 percent, for a combined ownership of 73 percent in private equity hands. Berkshire and Greenbriar have the right to nominate two directors for the board, and Goldman has the right to nominate three.
The deal will be extremely dilutive to current shareholders, with the number of shares outstanding more than doubling from 38.4 million to around 88.2 million following conversion of the preferred stock.
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