May 2011 Archives

If you're a private equity firm looking to exit chemical investments, you have a menu of options in today's market. Choices on the table include a straight sale into a seller's market, a dividend recapitalization supported by buoyant financing markets, and the elusive initial public offering (IPO).

The IPO route will be a popular one in the coming months as a number of chemical stocks have staged stunning rallies since hitting bottom at around March 2009 and have held up relatively well during the recent commodity asset downdraft.

The IPO window is somewhat akin to the famous huge and odiferous Indonesian "corpse flower" - never open for a long period of time, and when it shuts, it can remain shut for years.

Among those looking to go public are US-based specialty chemicals and materials company Momentive Performance Materials Holdings, which filed its S-1 registration statement with the US Securities and Exchange Commission on April 21.

US-based private equity firm Apollo Management has owned the many different assets comprising Momentive for years. It attempted to take one piece - Hexion Specialty Chemicals - public back in 2006 but pulled back because of tough market conditions. It has since combined Hexion with the former GE Silicones business to form today's Momentive.

But today's market looks ripe for an IPO attempt. One can look to the success of US-based Kraton Performance Polymers, which limped into the market in December 2009 at $13.50/share - a tough time for an IPO, but owners US-based private equity firms TPG Capital and J.P. Morgan Partners pulled it off. The shares hit a high of almost $48 in April but have pulled back to around $37.

There will be plenty of more IPO attempts to come. A number of other private equity-owned chemical companies are preparing for IPOs, according to sources in the financial community.

But IPOs are still limited to those chemical companies with the scale and exposure to growth markets that will interest investors. For many others, a straight sale would be the best option.

For all the latest deal activity and outlook, look out for our quarterly M&A update in the June 6 issue of ICIS Chemical Business.

Incidentally, the rare corpse flower at Ohio State University's greenhouse in the US bloomed in April for the first time in 10 years.

Photo credit: Wikipedia

The global economic recovery since we climbed out of the depths of the financial and economic crisis since 2009 has been described by many as a V-shaped recovery, refleting the strong rebound off the lows. But this recovery has also been characterized by volatility - volatility in crude oil prices, metals prices, commodity prices, and currency and interest rate movements.

When viewing long-term market trends, watch for extreme volatility to signal major turning points, especially following a long-lasting trend in one direction. Casting an eye on crude oil, the magnitude of daily price movements over the past few weeks has been off the charts.

Daily price swings of 4-5% are becoming more common - Wednesday saw a nearly 5% drop in crude oil prices on the NYMEX to under $100/bbl.

In the US, gasoline consumption fell as consumers protested $4/gal prices - a pittance compared to European prices, but a shocker for the US consumer nonetheless. Demand fell 2.4% in the week ended May 6 - the largest decline in seven consecutive weeks of demand drops.

In the UK on May 8, drivers manning about 150 vehicles staged a day-long protest against high fuel prices, driving at a deliberate pace across main highways to the Shell's Stanlow oil depot and refinery, where they continued to protest.

The best cure for high prices is high prices. Now consumers are pushing back, as their bills grow from higher gasoline prices, higher food prices, and the price inflation in commodities flowing through to everything from paints to packaged goods.

In the chemical markets, there has been increasing buyer push-back on the relentless rise in major commodities across the board.

In China, prices of low density polyethylene (LDPE) and nylon have been falling, while monoethylene glycol (MEG) has been stuck in neutral after coming off its highs earlier in the year. Europe LDPE and polypropylene (PP) spot prices took a hit last week on the back of plunging crude. In the US, one acrylonitrile (ACN) producer has cut operating rates on record feedstock propylene prices.

Buyers and sellers of chemicals look towards the crude oil price as a gauge, even if oil is not the main feedstock. A major medium-term reversal in trend resulting in declining crude oil prices would give some much-needed relief for beleaguered buyers.