Market Intelligence: Is Evonik and CVC a win-win?

Eventual IPO still in the cards

12 June 2008 14:50  [Source: ICB]

Dede Williams/Frankfurt

THE STORY of Evonik Industries on its way to the stock market will continue for several more years, but for now, it appears to have reached a happy, if temporary, conclusion.

All parties to the sale of a 25.1% stake in the German energy, specialty chemical and real estate group to private equity firm CVC Capital Partners have billed the June 4 deal as a win-win solution.

At a press conference, Evonik managing board chairman Werner Muller, RAG foundation chief Wilhelm Bonse-Geuking and CVC's Germany-based managing partner Steve Koltes heaped accolades on each other.

Most German commentators agreed that in the current weak stock market environment, the sale to a single private investor was the best way forward.

CVC PAID MORE THAN AN IPO WOULD HAVE RAISED

Analysts calculate that the €2.4bn ($3.75bn) to be paid by the London-based private equity group was more than an initial public offering (IPO) would have netted.

As some Germans may see CVC as one of a "plague of locusts" - the private equity companies that a former labor minister once saw as gobbling up the country's juiciest business morsels - Evonik is now going all-out to tout the London-based investor as a benign version.

A new advertising campaign portraying a smiling locust even pokes some gentle fun at the buyer.

Not only is CVC believed to be paying the RAG foundation that currently holds 100% of Evonik more than other private equity bidders offered, it has pledged to resell the package through the stock market within three to five years.

The RAG foundation also plans to float 49.8% of its own shares between 2010 and 2013, while keeping 25.1% to prevent a break-up of the company.

Evonik employees have also publicly welcomed CVC's entry into the fold, although observers warn that the mood could turn if the investor pushes major changes.

The chemical and mining workers union, IG BCE, whose chairman, Hubertus Schmoldt, is on the RAG foundation's board of trustees - has thrown its not inconsiderable weight behind the deal.

The union says it has been assured by CVC that its management sees employee participation in the corporate decision-making process as "well functioning."

BLACKSTONE WAS REPORTEDLY NOT WELCOME AS A BUYER

Some reports say employee representatives on the supervisory board balked at the idea of participation by US private equity giant Blackstone Group - one of three others still seen among the final four bidders.

This may reflect negative feedback from colleagues at US chemical group Celanese, where Blackstone once held a majority.

Financial watchdogs have expressed delight that, unlike many heavily debt-financed private equity transactions of the past, CVC plans to borrow only half of the funds needed to buy the Evonik stake - a situation analysts say reflects the new financing realities.

Especially pleasing to the German federal government and the coal mining state of North Rhine-Westphalia, which will be on the receiving end of the transaction monies, is that the attractive price the share package obtained appears to value Evonik more highly than previously believed.

Assuming that the sale of the remaining 49.98% produces an equally high yield, the company could be worth an estimated €8.4bn, to which the potential value of the foundation's 25.1% would be added. Auditor KPMG calculates the "perpetual burden" of the coal pay-off at €6.9bn.

BUYER BEWARE

Some outsiders caution insiders about too much euphoria.

Analysts wonder how CVC expects to get an adequate return on its investment, especially as the terms of the agreement mandate that it sell its shares only via the stock market, and no one knows how that will develop over the next few years.

Others warn that the cost of repaying the coal burden may have been underestimated.

The investor has been guaranteed an annual dividend on its stock of 50% of profits, a sum that analysts regard as low enough not to tie Evonik management's hands. The payout would range from €280m in 2008 to €400m in 2010, according to Evonik management's current earnings target.

Muller aims to double the value of the company within five years, but has as yet presented no details as to how this would be done. He has hinted at acquisitions, although given the heterogeneity of the portfolio it is hard to see where these would take place.

The sale of the real estate business, which has no synergies with chemicals and energy, continues to be regarded by most as a logical move.

After the painful experience of having to sell its construction chemical business to Germany's BASF to generate revenue, management of the chemical arm could be expected to oppose major divestments.

And following several rounds of job cuts in the not-too-distant past, employees would be loath to see management save at its expense.








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