Analysis: Noveon's $345m IPO signals rebound sentiments

27 February 2004 17:00  [Source: ICIS news]

NEW YORK (CNI)--Noveon's recent decision to try a new initial public offering (IPO) appears to underscore a growing belief by analysts and the industry that economic fundamentals are swinging back to a positive posture.

"Now is a pretty good time to take chemical companies public," said Paul Collins, managing director and head of global chemicals at Lehman Brothers. "There's a fair degree of optimism among investors given where we are in the economic cycle. Many chemical stocks have traded up, and investors are looking for new opportunities."

And Peter Young, president of Young & Partners investment bank, said: "Market conditions for an IPO in chemicals are better for Noveon than they were a year or two ago, but it's clearly not a return to robust markets. The investor's view of chemical stocks is still mixed."

While the market for chemical IPOs has been dead for years, one major sign of encouragement came from the successful $217m (Euro175m) IPO of Compass Minerals International in January. Apollo Management, which still retains a 38% stake in the company, was able to sell off a major portion of its equity in Compass after buying the business (formerly IMC Global's salt and sulphur chemicals unit) in November 2001 for $600m.

Noveon tried going public once before, in July 2002, but the company withdrew its initial registration statement in May 2003. This time it hopes to raise $345m.

The Compass IPO was the first in the US chemical industry since Cabot Microelectronics went public in April 2000. Initial public offerings involving chemical companies have been scarce for more than a decade.

"You really have to go back to the late 1980s to find large IPOs such as Arco Chemical and Lyondell," said Collins.

With sales of $1.14bn last year, Noveon is a mid-sized player in the specialty chemicals sector with products in diverse markets. The company's three business segments are consumer specialties, specialty materials and performance coatings. The company has applied to list its stock on the New York Stock Exchange under the symbol "NOV." The lead underwriters for the offering are CS First Boston, Deutsche Bank and UBS.

Noveon was created in the $1.39bn leveraged buyout of BFGoodrich's performance chemicals division by a private equity consortium consisting of AEA Investors, DLJ Merchant Banking Partners and MidOcean Capital back in February 2001. The investors contributed $355m in equity to Noveon, funding the rest of the purchase by issuing debt.

With many private equity firms owning chemical assets for several years now, a number are seeking exit options.

Said Collins: "The IPO is clearly a viable route for these guys. Strategic buyers are still a bit gun shy when it comes to large deals, and public company values are the highest I've seen in quite awhile, so an IPO today is a very logical way for financial sponsors to exit."

In 2003, Noveon posted a net loss of $7.9m versus a profit of $23.7m in 2002. The 2003 results included restructuring and severance charges of $13.2m while 2002 results included charges of $6.1m. Underlying operating profits fell 15% to $107m. In the fourth quarter of 2003, Noveon posted underlying net income of $100 000 versus a profit of $1.3m in the year-ago period.

"In the fourth quarter, we saw signs of a stronger business environment with sequential sales growth over the third quarter. In addition, we experienced our seventh consecutive quarter of sales growth over the prior year," said Noveon's president and chief executive, Steve Demetriou, on the release of results earlier this month.

Noveon generated $118m in cash from operating activities and spent $56.6m on capital expenditures in 2003, leading to free cash flow of $61.4m. In 2002, the company generated $143.7m in cash from operating activities and had capital expenditures of $52.3m, leading to free cash flow of $91.4m.

At the end of 2003, Noveon had $1.03bn in debt and $116.8m in cash on its books, for net debt of $913.5m. Proceeds from the IPO will go towards debt reduction, and some will go to Noveon's investors. The amount of new equity to be issued and the amount to be sold by existing shareholders have yet to be determined.

"Noveon will likely use its proceeds for debt reduction, at the onset," said Standard & Poor's (S&P) credit analyst Peter Kelly. "As a result, the company's credit protection measures will improve from currently stretched levels and approach the levels expected at the current ratings. Nevertheless, the company will remain aggressively capitalised, and the ratings recognise that smaller, debt-financed bolt-on acquisitions are possible."

Noveon's consumer specialties unit consists of chemicals for the personal care, pharmaceutical, and food and beverage industries. Key products include acrylic thickeners, emollients, silicones, botanicals, active pharmaceutical ingredients, fragrances, synthetic food dyes and natural colorants.

Noveon has made a slew of small acquisitions over the years to boost its market positions in consumer specialties, specialty plastics and coatings.

In January, the company acquired Scher Chemicals, a manufacturer of emollient and surfactant specialty chemicals used in cosmetic and other personal care formulations. The deal follows a controlling shareholder investment in Thailand-based botanical extracts maker Specialty Natural Products Company in September. In December 2002, Noveon bought certain dispersion assets of CDI Dispersions used to serve the food and beverage, personal care and pharmaceutical industries. And in June 2002, Noveon acquired Multiquim SA, a supplier of personal care, pharmaceutical and other products in Mexico.

Acquisitions in specialty plastics include the purchase of certain assets of thermoplastic polyurethane (TPU) producer Thermedics Polymer from Viasys Healthcare in October; sheet extrusion technology for use in electronics, and other assets from France-based SJM Eurostat a year ago; assets and technology of French TPU compounder Gemoplast in October 2002; and, intellectual property and certain assets related to cross-linked polyethylene (PE) compounds from AT Plastics in January 2002.

Noveon also has bolstered its presence in performance coatings with the acquisition of water-based overprint coatings technology and manufacturing assets from Flint Ink in March 2003, and performance coatings assets from American Finish & Chemical in June 2002.

Noveon also is investing in new capacity, particularly in China.

The company is building a TPU plant near Shanghai for start-up in the fourth quarter of 2004 to better serve its Asian customers. In March 2003, it started up its 8000 tonne/year performance coatings manufacturing plant and applications lab in Qingpu, Shanghai, China.

(For additional
Chemical Market Reporter analysis visit the CMR Web site at: http://www.chemicalmarketreporter.com/.)


By: Joe Chang, Chemical Market Reporter
+1 713 525 2653



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