INSIGHT: TPC Group leveraged buyout feasible

03 August 2012 17:47  [Source: ICIS news]

By Joseph Chang

NEW YORK (ICIS)--A leveraged buyout (LBO) of US-based butadiene (BD) producer TPC Group is feasible, based on strong expected cash flows and low current debt levels.

The company has been rumoured as a candidate for an LBO at around $40/share, as reported by Bloomberg on 25 July.

Today TPC Group reported better-than-expected second quarter earnings of $3m on $690m ($566m) in sales. Earnings before interest, tax, depreciation and amortisation (EBITDA) were $24m – down from $71m in the year-ago period.

Before the question-and-answer session on the earnings call, president and CEO Mike McDonnell said the company would not comment on rumours or speculation on possible transactions.

Now let’s run some numbers and see if an LBO would be possible.

In the 12 months to June 2012, TPC Group generated $92.6m in EBITDA on sales of $2.7bn.

Net interest expense was $32.4m during that time, while capital expenditures were $53.7m.

The company has a solid balance sheet, with $135.4m in cash and equivalents against long-term debt of $348.2m, giving it net debt of $212.8m.

TPC is relatively underleveraged, with net debt/EBITDA of just 2.3 times.

So what would a buyout at $40/share cost? To buy out all of TPC’s 15.8m shares, it would cost $632m. But in an LBO, which would most likely involve a private equity buyer, the buyout would involve a mix of equity and debt.

For this exercise, let’s assume a private equity firm finances the LBO with 20% equity and 80% debt.

This would result in an additional debt load of $505.6m, for total net debt of $718.4m.

Net debt/EBITDA based on trailing 12-month results would jump to 7.8 times – a very high debt level.

But the last 12 months has seen very lumpy results, including a disastrous fourth quarter of 2011 where plunging BD prices resulted in -$11.0m in EBITDA.

If you look at the prior 12 months from the March 2012 quarter, which also includes that disastrous quarter, along with a very good June 2011 quarter, you get EBITDA of $139.6m.

A normalised level of EBITDA would be likely to fall somewhere in between the $92.6m in the 12 months to June 2012 and the $139.6m in the 12 months to March 2012.

Indeed Edward Yang, analyst at global investment bank Oppenheimer, estimates full year 2012 EBITDA of $128m, and expects 2013 EBITDA to surge to $171m.

Using those estimates, the debt levels don’t appear as elevated. Net debt to estimated 2012 EBITDA would be 5.6 times – high but manageable.

And based on Oppenheimer’s estimated 2013 estimates, net debt to EBITDA would be 4.2 times.

To give this some perspective, after US-based chemical producer Rockwood Holdings’ LBO in 2003, debt-to-EBITDA was around 6.7 times.

So would a leveraged buyout at $40/share be possible? Absolutely.

Yet shares of TPC have already breached that level today, trading up $1.24, to 3.2%, to $40.06 by noon on the Nasdaq exchange.

($1 = €0.82)

Paul Hodges studies the key influences shaping the chemical industry in Chemicals and the Economy

By: Joseph Chang
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