INSIGHT: Markets are nervy but chems distribution is still attractive

07 September 2010 17:42  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Nervy global financial markets amid fears of a double dip recession put paid to plans for the Univar IPO (initial public offering). A preferred exit route perhaps for private equity funds holding chemicals distributors but one sensibly avoided in the current financial climate.

The distribution business should be doing well, however. Those with the geographic reach, certainly, will be benefiting from chemicals demand growth in the emerging economies. Sector players, nevertheless, battle with the concept of scale. Do you add more territory, and more product lines, to the mix? And if so doesn’t that serve to make business life more difficult and not necessarily better?

Chemicals distribution is attractive to private equity and the private investor: it provides an access point to some fast going industrial markets in the hottest parts of the world. That having been said, there always comes a time when investors want or need to cash out - or to raise additional funds.

Earlier this year, Brenntag’s owners were quick off the mark and successful with that firm’s IPO. The company since appears to have gone from strength to strength.

Univar’s owner CVC Capital Partners thought an IPO attractive in a rising market but has been offered something better given current conditions. Clayton Dubilier & Rice (CD&R), another private equity firm, has taken a 42.5% stake in Univar which has valued the distributor at $4.2bn (€3.3bn). CVC retains 42.5% with the remainder held by other investors and Univar management.

“CD&R invested in the company because they liked the secular trends in chemical distribution as well as our performance,” Univar CEO John Zillmer said in an interview with ICIS at the end of last week.

Zillmer added that strategy would not change with the new investment and shift in the ownership mix. Univar still wants to build market share domestically “through organic growth and through M&A [mergers and acquisitions]”.

The distributor has taken the opportunity to refinance its debt and to extend debt maturities and with a refreshed capital structure doesn’t see the need for additional capital.

The company and CVC capital Partners had wanted to raise $863m in the stock offering. At the end of March this year it had $1.68bn of long-term debt and $115m in cash.

Univar has sales of some $7.2bn with 179 distribution centres in 100 countries. The firm reckons it holds the number one market position in the US and Canada and is number two in Europe.

Rival Brenntag’s IPO in February raised €748m for its owner, London based private equity firm BC partners. A tad quicker off the mark, BC was able to capitalise on the much improved German financial market at the start of the year.

The successful IPO saw the shares start trading around €54 and despite a drop in May a strong recovery from June around €62 today. Brenntag has made a number of small-scale acquisitions since the IPO - illustrating the drive in the chemicals distribution business for greater market reach. And the company produced a healthy set of second quarter financial results with earnings before interest, tax, depreciation and amortisation (EBITDA) up 15% and particularly strong results from Asia-Pacific business.

Brenntag claims global market leadership in “full-line” chemicals distribution with 2009 revenues of €6.4bn. It is anticipating double digit profits growth this year and an EBITDA of between €570m and €600m.

At the end of June 2010 its net debt was €1.42bn compared with a year end 2009 figure of €2.54bn. Also at the end of June this year the company reported equity of €1.55bn compared with the 31 December 2009 figure of €172m.

As illustrated by the Brenntag IPO earlier in the year and the company’s performance since - and by the change in ownership and capital structure of Univar - the chemicals distribution business is a ripe hunting ground for the investor, both public and private.

Resilience was shown during the recession but the more attractive prospects are the opportunities for growth in emerging markets - Asia and Latin America but also still relatively obscure regional markets such as North Africa.

The fact that these players offer such resilience and growth will keep them in the sights of private equity and other financial players as the global chemicals markets continue to recover and expand.

($1 = €0.78)

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By: Nigel Davis
+44 20 8652 3214

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