Analysis: Apollo creates $4bn specialty chemicals leader

29 April 2005 17:00  [Source: ICIS news]

NEW YORK (CNI)--After making a series of acquisitions over the years, private equity firm Apollo Management will merge three of its chemical businesses to create Hexion Specialty Chemicals, the third largest North American specialty chemical company with over $4bn (Euro3.1bn) in sales.

Apollo has also filed to take Hexion public, expecting to raise up to $800m in an initial pubic offering (IPO).

Hexion will comprise Borden Chemical, Resolution Performance Products (RPP), Resolution Specialty Materials (RSM), as well as Bakelite, which Borden is acquiring from Rütgers. The combination and acquisition of Bakelite should be complete during the second quarter and an IPO could follow shortly thereafter.

"A number of bankers thought this would be a likely outcome as Apollo made resins acquisitions late last year, and Hexion should have sufficient scale to get attention in the marketplace," said Gary Denning, director of the chemical industry practice at investment bank Houlihan Lokey. "An IPO is a great exit mechanism today with stocks trading at healthy multiples."

With pro forma sales of $4.11bn in 2004, Columbus, Ohio-based Hexion will be the world’s leading producer of thermosetting resins for use in paints, coatings, glues and other adhesives for consumer and industrial applications. It will have a global complexion with 51% of sales from North America, 32% from Western Europe and 17% from Asia and the rest of the world.

The businesses that will comprise Hexion (including Bakelite) generated $446m in adjusted EBITDA (earnings before interest, taxes, depreciation and amortisation, including expected synergies) in 2004. Excluding Bakelite, Hexion had combined pro forma debt of $2bn at the end of last year.

"We believe the consolidation of these entities will provide us with significant opportunities for growth through global product line management, in addition to opportunities for increasing operational efficiencies, reducing fixed costs, optimising manufacturing assets and improving the efficiency of capital spending," according to Hexion’s S-1 filing with the Securities and Exchange Commission.

After its formation, Hexion will implement a restructuring programme across its businesses, targeting over $82m in annual synergies by the first 18 months.

Hexion will operate in two segments - adhesive and structural ($2.9bn in sales) and coatings ($1.2bn).

The adhesive and structural segment’s key products include formaldehyde-based resins and intermediates for use in the forest products market (such as home construction); epoxy resins and intermediates used in the automotive, aerospace and electronics industries; composite resins used in diverse applications from airframes to golf clubs; phenolic encapsulated substrates for oilfield applications; and molding compounds for the automotive industry.

The coatings segment produces epoxy resins, polyester resins, alkyd resins and acrylic resins for a wide variety of paints and coatings in the industrial and consumer sectors; as well as ink resins and additives, and versatic acids and derivatives for the coatings market.

Hexion will seek to be a consolidator in the highly fragmented global thermoset resins business.

"As the largest company focused primarily on the thermoset resins space, we have a significant advantage in pursuing add-on acquisitions and joint ventures in areas that allow us to build upon our core strengths," Hexion stated in its S-1 filing. "We believe we can consummate a number of these acquisitions at relatively low valuations due to the scalability of our existing global operations."

Hexion is pursuing a number of tuck-in acquisitions to add product line extensions. The firm is also pursuing joint ventures to expand its geographic footprint.

Apollo History of Successful IPOs

Apollo Management has been an active acquirer of chemical assets over the years and has had a string of successful IPOs.

"For Apollo, it’s been one successful investment after another, and the latest move appears to be a continuation of that theme," said Houlihan Lokey’s Denning. "Apollo is very aggressive about how they pursue acquisitions - they’re tough negotiators on the way in, and set themselves up well on the way out."

The private equity firm, along with Blackstone Group and Goldman Sachs, bought water treatment chemicals giant Nalco for $4.2bn in November 2003 and then took it public a year later. Apollo also acquired fertiliser distributor and producer UAP for $610m in October 2003, taking it public in November 2004.

While those recent IPOs were relatively quick profitable conversions of acquisitions in a hot environment, Apollo has been patient with others.

Kicking off the chemicals IPO boom in December 2003, the firm took Compass Minerals International public after acquiring the salt assets of IMC Global back in November 2001 for about $640m.

The composition of Hexion Specialty Chemicals comes from acquisitions new and old.

Apollo acquired Borden Chemical in August 2004 for $1.2bn, a few months after former owner Kohlberg Kravis Roberts & Co. (KKR) filed to take it public. Borden Chemical had sales of $1.7bn and adjusted EBITDA of $173m in 2004 from binding and bonding resins, performance adhesives and building-block chemical formaldehyde.

Resolution Specialty Materials was also formed in August 2004 with Apollo’s $215m acquisition of certain coatings, adhesives, specialty polymers and ink ingredients assets of Eastman Chemical Company.

RSM, which recorded sales of $768m and $60m in adjusted EBITDA in 2004 (more than doubling 2003 levels), produces acrylate ester monomers, unsaturated polyester resins, inks and graphics arts raw materials, liquid resins, powder resins and textile chemicals.

Apollo agreed to buy Bakelite from Rutgers in October 2004 and expects to pay around $303m for the business, or a modest 5.5 x 2004 EBITDA. Bakelite, which makes phenolic and epoxy resins, had sales of $699m and $55m in adjusted EBITDA in 2004.

Resolution Performance Products, which was created through Apollo’s acquisition of Shell’s epoxy resins business in 2000, has been struggling for years, but is poised to finally achieve value for its owner through the upcoming Hexion IPO. Resolution posted sales of $996m in 2004 while adjusted EBITDA rose 77% to $83m in 2004.

Similar Deals to Come?

Similar deals to the formation of Hexion and planned IPO could emerge from other private equity firms seeking to take advantage of the relatively favourable equity markets.

KKR has put together a portfolio of specialty chemical businesses with Rockwood Specialties, buying out most of the assets of Dynamit Nobel for Euro.25bn in August 2004. KKR bought the specialty chemical assets of Laporte PLC in 2000 for $1.2bn to form Rockwood Specialties.

Rockwood Holdings filed for an IPO in February, aiming to raise up to $500m. The company had pro forma sales of $2.45bn in 2003 in diverse segments such as custom synthesis, performance additives, advanced ceramics, specialty compounds, electronics, specialty chemicals and titanium dioxide pigments.

"With a diverse set of businesses such as Rockwood, it’s certainly easier to get good value from the public marketplace right now than to try to sell to a strategic buyer," said Houlihan Lokey’s Denning.

By: Joseph Chang
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