January 2011 Archives

Financing markets have loosened up considerably, setting the stage for another golden age for private equity.

Aside from the low interest rates, we are seeing looser terms on debt that were a feature of the the peak in private equity mergers and acquisitions (M&A) activity in 2007.

Chinh Chu, senior managing director of US-based private equity giant Blackstone Group noted the return of such terms, as well as the high levels of leverage available for deals.

Chu engineered Blackstone's 2004 leveraged buyout (LBO) of Celanese and its subsequent initial public offering (IPO) in 2005 that netted a return of 6x its initial investment of about $650m. It was one of the most successful LBO deals in history.

Today it is possible to borrow at about 6-6.5 times the target's earnings before interest, tax, depreciation and amortization (EBITDA) in a leveraged buyout - very close to the 7 times level in 2007.

Features available in the heyday included payment-in-kind (PIK) options and covenant-lite loans. With a PIK option, the borrower can pay back debt with more debt. Covenant-lite loans contain fewer restrictions, such as maintaining a level of cash flow. Nobody would have predicted these would come back so quickly.

The only major difference today versus 2007 is that the absolute amount of funds available to borrow is less, being able to facilitate deals up to $8bn, versus $20bn in 2007, noted Chu.

That level is still plenty to drive a robust amount of chemical deals. Expect private equity to play a bigger role in chemical M&A in 2011.

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Kicking off the New Year with a bang, US-based chemical major DuPont's $6.3bn (€4.8bn) deal to acquire Danish food ­ingredients and enzymes producer Dansico sets the tone for what will be a huge year for chemical mergers and acquisitions (M&A) in 2011.

If the animal spirits arising from the strong recovery can awaken even DuPont, we will be in full M&A swing sooner rather than later.

The company has avoided mega deals since its $7.7bn acquisition of US seed company Pioneer Hi-Bred back in 1999. While at first, most on Wall Street rushed to praise the deal, and some announced $100 price targets on DuPont's stock, investors eventually criticized it as being too expensive. After reaching an all-time high of nearly $80 in 1998 after the deal was announced, the stock fell into the $40s by 2000.

Management went out of its way to emphasize its commitment to "financial discipline", which included eschewing major acquisitions in favor of debt paydown and share buybacks.

Even after the company had built one of the strongest balance sheets in the chemical universe, it was still gun-shy on the M&A front - a legacy of the Pioneer transaction. It likely missed a big opportunity to ­acquire assets during the global financial and economic crisis of 2008-2009 - even as it was dealing with its own cost-cutting issues. It had, arguably, the best balance sheet in the business.

But now, chair and CEO Ellen Kullman is taking a shot with Danisco, to take advantage of the global megatrends in food and fuel (DuPont and Dansico also have a cellulosic ethanol joint venture).

And the deal is not a cheap one. DuPont is paying $5.8bn and the assumption of around $500m in net debt. The purchase price represents a robust EV/EBITDA (enterprise value/earnings before interest, tax, depreciation and amortization) multiple of 12.8 times trailing 12-month EBITDA, according to JP Morgan analyst Jeffrey Zekauskas.

But at least there is no initial euphoria at the deal on the part of Wall Street analysts or investors. DuPont's stock closed down 1.5% on the day of the announcement to around $49 - half the price target some had bandied about back in 1998.

Kullman has already boosted DuPont's competitiveness through the downturn. Now she will put her mark on the storied company through this mega deal.

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