Commentary: Innospec eyes TPC Group for back integration

12 October 2012 09:35  [Source: ICB]

The company aims to back-integrate its fuel and lubricant additives business with a bid to acquire TPC Group. And bringing in a private equity partner makes sense

UK-headquartered specialty chemicals firm Innospec's interest in acquiring US-based butadiene (BD) producer TPC Group is likely being driven by the latter's production of a key component in fuel and lubricant additives.

Innospec sets its sights on back-integration Copyright: RexFeatures

However, since that specialised business represents a relatively small part of TPC's sales, it only makes sense to bring in a private equity partner. The profile of TPC, with the bulk of its business being in commodity BD, is of obvious appeal to private equity.

"Innospec is probably interested in TPC's Performance Products business - fuel and lubricant additives," Ed Yang, analyst with investment bank Oppenheimer, notes.

TPC is North America's "sole merchant producer of highly reactive polyisobutylene, a major component of dispersants for the fuel and lubricant additive markets", it stated in its 10-K annual filing with the US Securities and Exchange Commission in February.

On 8 October, TPC announced that it received a non-binding proposal to be acquired by Innospec through an all-cash purchase price in the range of $44-46/share. Equity financing would be provided by US private equity firm Blackstone. The proposal trumps a deal by global investment firm First Reserve and US private equity firm to buy TPC for $40/share, which was announced in August.

That deal was blasted by Thomas Sandell, CEO of Sandell Asset Management, as an attempt "to steal the company at a grossly suboptimal price in a sweetheart LBO [leveraged buyout] with a favoured buyer in an impaired sale process at the bottom of the cycle". Sandell owns about 6% of TPC's shares.

"We are not surprised [at the new proposal], as we'd been consistently doubtful that a transaction could close at $40/share given that it significantly undervalues the company and [that there would be] limited downside to rejecting [it]," said Yang.

The analyst expects TPC to be sold in the $50/share range, representing multiples of around 13 times price/earnings and 5.8 times earnings before interest, tax, depreciation and amortisation (EBITDA).

TPC's Performance Products business - which makes products for fuel and lubricant additives among other specialties - generated $271m (€209m) in sales in the first half of 2012, accounting for about 20% of total sales. Innospec's fuel specialties segment comprises the bulk of the company's business. In the first half of 2012, the segment generated $245m in sales, accounting for 65% of sales.

By: Joseph Chang
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