Recently in Mergers and Acquisitions Category

The M&A charge continues with US-based chemical company Ashland announcing its plan to acquire US-based International Specialty Products (ISP) for $3.2bn (€2.2bn).

The deal further transforms Ashland into a higher-margin, higher-growth specialty chemicals leader, as the ISP transaction bolsters its offerings to the personal care, food and beverage, pharmaceutical and oilfield chemical areas.

Looking at Ashland's portfolio of businesses, it will weigh more heavily on the specialty side. Indeed, after the close of the deal, expected in September, 74% of its earnings before interest, tax, depreciation and amortization (EBITDA) will be from specialty chemicals businesses. This compares to just 15% in 2004 before it embarked on its transformation.

The company's margin profile improves substantially, as ISP had a robust EBITDA margin of 22.5% in the 12 months ended March. Ashland's EBITDA margin for the same period was 12.3% - hardly resembling that of a premier specialty company. On a combined basis, the new Ashland would have an EBITDA margin of 14.5%.

But there's plenty more the company can do to boost its margin profile into the 20%-plus range, reaching up to the ether of the elite specialty chemical companies.

The deal makes absolute strategic sense for Ashland as the next step in its transformation story, but as chairman and CEO James O'Brien said in an interview last week, "the story is not fully written."

This could well involve the sale of its lower-margin, more commodity assets. Included that bucket would be its performance materials unit, which includes unsaturated polyester resins (UPS), vinyl ester resins and adhesives. That business had an EBITDA margin of just 6.9% in the 12 months ended March. Its Valvoline lubricants unit would also be a sale candidate.

ISP itself is not 100% specialty, as it has butanediol (BDO) and emulsion styrene-butadiene rubber (ESBR) assets. These were not core assets for ISP, and are not likely to be core to Ashland.

ISP had said for years that it would be open to selling its BDO business if it had the right offer. And it picked up the rubber assets in a distressed sale by bankrupt Ameripol Synpol in 2003 - simply an "opportunistic" acquisition.

Ashland, having sold off its chemical distribution, road paving materials and refining assets through the years, appears set to embark on its next series of asset sales. Besides, it has some debt to pay off.

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.

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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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Get ready to see more private equity firms selling chemical assets to other private equity firms to other private equity firms. These so-called sponsor-to-sponsor deals will become more prevalent based on several factors.

First, many financial buyers are seeking to exit investments made during the private equity boom in the 2000s through 2008. The typical holding period is 3-5 years, and many are getting long in the tooth.

Second, private equity firms also have plenty of cash to spend in their more recently raised funds. This money needs to be put to work. Third, strategic buyers are being selective, typically buying only those assets that fit within their current portfolios - often financial buyers are the only ones interested.

Lastly, the overall high-yield financing market remains robust.

Last week saw US-based Royal Adhesives & Sealants sold by Quad-C Management to Arsenal Capital Partners. Other sponsor-to-sponsor deals this year involve US-based companies Arizona Chemical and Univar.

More of these deals will surely come. But an interesting question is: How will one sponsor create value from an asset already owned and cost-optimized for years by another? The answer is likely a combination of leverage and roll-up opportunities.

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With the global industrial recovery starting to fire on all cylinders, chemical companies are coming out with increasingly bullish projections for both short and long-term growth.

The comfort level is such that even five-year projections are back on the table - something unimaginable two years ago when the prognosticator's crystal ball clouded over completely.

US-based specialty chemical companies Solutia and Rockwood both came out with robust profit projections for 2011-2015 at their respective investor days in New York.

Solutia expects to post 2011 earnings per share (EPS) of $2.00-2.25 (€1.46-1.65) per share - up from an estimated range of $1.40-1.50 per share in 2010. The guidance came in significantly higher than Wall Street consensus estimates of $1.70 per share for 2011.

And sales in 2011 are expected to rise to $2.1bn-2.2bn from around $1.9bn in 2010, while earnings before interest, tax, depreciation and amortization (EBITDA) are projected to jump to $560-600m from $480m-500m in 2010.

Shares in Solutia jumped by nearly 10% to $20.75 on the better-than-expected guidance.

And in the longer term, CEO Jeffry Quinn said the portfolio has the potential to produce $3.5bn in revenue by 2015, while raising EBITDA to over $1bn.

This translates into 13% annual revenue growth - and that's excluding acquisitions. In addition, the company aims to raise its industry-leading 26% EBITDA margins to about 30% during the period.

The outlook is "very robust... but achievable", said Quinn. Growth is expected to be driven by advanced interlayers made from polyvinyl butyral (PVB) and ethylene vinyl acetate (EVA) for solar and automotive applications, as well as polyethylene terephthalate (PET) performance films for electronics.

And Rockwood is targeting over 20%/year EPS growth from 2011-2015, according to CEO Seifi Ghasemi. The producer of specialty titanium dioxide, lithium compounds, ceramics and surface treatment chemicals also aims to boost its healthy EBITDA margins from almost 20% today to over 22% through the period.

Furthermore, sales growth of around 8% is expected at Rockwood in this period, with organic growth accounting for 5% and bolt-on acquisitions about 3%.

As companies gain confidence in the economic outlook as well as their ability to raise prices, expect more bullish projections in the weeks ahead.

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After years of discussions, Japan's chemical industry is finally pushing ahead with major consolidation of its petrochemical facilities to boost competitiveness on the global stage.

Japan's largest chemical company Mitsubishi Chemical Holdings and Asahi Kasei, which will start up a joint venture company to unify their cracker operations at Mizushima on April 1, 2011.

The companies will adjust their capacities downward by 2012 based on an expected 30% decrease in ethylene demand, and eventually concentrate on a single naphtha cracker. Right now, both companies have their own crackers - each with 500,000 tonnes/year of ethylene capacity. These are relatively old crackers, with Mitsubishi's built in 1964 and Asahi Kasei's in 1965.

The cracker consolidation move is in response to "declining domestic demand, expansion of large-scale production facilities in the Middle East and increasing supply capacity in China," according to the companies.

Many of Japan's older crackers simply cannot compete with facilities based on advantaged feedstocks in the Middle East and new, larger plants in China that are at the epicenter of an explosion in demand.

Japan's crackers will increasingly serve their domestic market, as exports face greater competition from Middle East product and China's growing capacity.

Ryota Hamamoto, Japanese chemical industry veteran and now senior executive adviser at consultancy Accenture Japan, predicts that 3-5 less competitive crackers comprising 1.5-2m tonnes of ethylene capacity could be shut down in the next 5-6 years (see page 35).

On October 1, the cracker operations of Mitsui Chemicals and Idemitsu Kosan at Chiba started operating under one joint venture called Chiba Chemical Manufacturing. Mitsui's cracker at the site has 553,000 tonnes/year of ethylene capacity while Idemitsu's cracker has 374,000 tonnes/year of ethylene capacity. This also points to capacity consolidation, as the companies will explore "raw material options, production optimization, and added value components to form an ethylene center with top level of competitiveness in Japan."

These bold and necessary moves are taking place at the same time companies boost their capabilities in specialty chemicals and polymers, and key intermediates.

We are proud to bring you this special issue on Japan's chemical industry in cooperation with our partner The Chemical Daily of Japan, which has unparalleled on-the-ground insight into this fascinating market.

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Transforming a business is no easy feat. First you have to recognize the necessity for change, and then comes the daunting execution, which can take years. And even after a major transformation, it can take time for people to fully appreciate the change and its implications.

Take US-based specialty materials firm Solutia for instance. It is an altogether different animal than the one that entered bankruptcy in 2003. The "former" Solutia featured a commodity nylon business that overshadowed its performance business, accounting for $964m, or 57% of sales, and generating a $50m loss in the first three quarters of 2003 before it filed for bankruptcy.

The company was also saddled with $1.13bn in pension and $428m in environmental and other liabilities - legacy liabilities it assumed when it was spun off from Monsanto in 1997.

In bankruptcy for the next several years, under its new CEO Jeffry Quinn appointed in 2004, it embarked on a strategy to focus on "high-potential businesses" that could deliver returns above the cost of capital.

In 2005, Solutia shut down its acrylic fibers business. The company and partner US-based chemical firm FMC also sold their 50:50 phosphates joint venture Astaris for $255m.
In 2006, Solutia sold its pharmaceutical services business for $74.5m. In 2007, it disposed of its water treatment phosphonates business for $67m.

In 2008, it finally emerged from Chapter 11 bankruptcy protection, shedding much of its legacy liabilities. But it was still known in some circles as "the nylon company" - a moniker that implied flat growth and exposure to volatile market forces.

In June 2009, Solutia shed its large nylon business for $50m, completing its transformation into a producer of advanced interlayers, performance films and technical specialties.

After two acquisitions in 2010 boosting its window films business and adding ethylene vinyl acetate-based solar encapsulants to its portfolio, Solutia sports enviable high-margins and strong growth prospects. Now if only investors would pay attention. Solutia at $15.70 trades at a modest EV/EBITDA (enterprise value/earnings before interest, tax, depreciation and amortization) multiple of 6.3 times trailing 12-month EBITDA.

We talked to CEO Quinn about the transformation and his growth plan in the September 27 issue of ICIS Chemical Business, which could entail the company adding a fourth business in the future.

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With interest rates scraping the depths and businesses hoarding record amounts of cash on their balance sheets, the time is ripe to make acquisitions as well as refinance debt to push out maturities.

While refinancing debt at low rates is a no-brainer, there are plenty of pitfalls in the mergers and acquisitions (M&A) game.

Already we are seeing M&A activity heating up, evidenced not only by more completed transactions and a higher deal backlog, but also by the emergence of hostile takeover bids.

Australia-based mining giant BHP Billiton's unsolicited offer to acquire Canadian fertilizer major PotashCorp for $130/share, or around $39.6bn (€31.3bn), was rejected by the target on August 23. US-based Airgas has already rejected a revised offer by US-based Air Products to take it over at $63.50/share, or about $5.4bn.

In the chemical arena, there are an increasing number of assets on the selling block, but typically, the ones of the highest quality are not readily available. It may well take a hostile bid to walk away with a prized asset.

The attempted takeover examples above in the fertilizer and industrial gases sectors are linked by one important quality - the assets are unique and rare.

PotashCorp is the global leader in the production of potash - an essential mineral in enhancing crop production. The company, in its rejection letter to BHP, characterizes the potash industry as having substantial barriers to entry, few producers and no product substitutes.

And how many industrial gases companies are out there of any size? In the US, you're down to Air Products, Praxair and Airgas. Outside the US, there are France's Air Liquide, Germany's Linde and Japan's Taiyo Nippon Sanso.

In Airgas' latest salvo against its pursuer on August 23, it complained that Air Products has so far failed to offer an appropriate price - "one that compensates our stockholders for Airgas' scarcity and synergy value."

PotashCorp and Airgas are no doubt rare and quality assets. And scarcity always commands a premium.

But while companies with strong balance sheets should look for synergistic deals, it's important not to get carried away on price.

Alembic Global Advisors partner Hassan Ahmed concludes that the chemical industry has a track record of value-destroying M&A activity. Chemical company buyers have on average seen their stock prices drop 3.8% over one year and 19.4% over three years.

The key mistake buyers have made was to overestimate synergies and thus overpay for acquisitions.

"Overestimating synergies leads to unattainable expectations - and stock underperformance typically results when promised synergies fail to materialize," said Hassan in a research note.
On the financing front, companies should be lining up to refinance debt - that's a no brainer.

One big lesson of the financial crisis of 2008-2009 was that you should not wait until the last minute to refinance your debt.

US specialty chemicals firm Chemtura and Canada's NOVA Chemicals caught with debt coming due in a collapsing financial market basically had two choices as the clock ticked away - declare bankruptcy or sell out. Chemtura chose the former and NOVA the latter.

Today there is no excuse for a company not to push out its debt maturities. Interest rates are at record lows, and financing is available - even to those companies without the most stellar credit ratings.

US specialty chemicals firm Ferro in August sold $250m in senior notes due 2018 with a coupon of 7.875% - not the cheapest debt, but not bad for a company with a speculative "B" credit rating from ratings agency Standard & Poor's.

That's security you can take to the bank.

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