SK Capital poised for more buyouts of chem carve-outs

NEW YORK (ICIS)–Private equity firm SK Capital is poised to take advantage of more chemical corporate carve-out opportunities with its industry-focused expertise and broad portfolio of assets, senior executives at the firm said.

“The majority of our portfolio of north of $9bn in annual sales are spinouts of corporations. This is an area of specialisation for us – to be able to separate a business to become an independent, successful company,” said Barry Siadat, co-founder and managing director of SK Capital, in an interview with ICIS.

“That’s become a major differentiator for us – both with sellers and also employees who feel valued as part of a business that’s considered core by its owner,” he added.

For the large corporate seller, SK Capital offers speed and certainty of execution on deals, as well as the industry expertise to be good stewards of the business and employees following the transaction, he said.

“There is complexity in carving out a business – it is not easily done and the experience of the buyer can be a concern to the seller, especially when there are ongoing commercial arrangements and shared sites,” said Jack Norris, managing director at SK Capital.

With a broad portfolio of chemical assets – Ascend Performance Materials, SI Group, GEON Performance Solutions (former PolyOne compounding), TPC Group, Archroma and Perimeter Solutions (former ICL fire safety and oil additives) among others – SK companies operate on multiple sites where they are either tenants on sites of other chemical companies or operate sites where other companies are tenants.

“We have good arrangements with other chemical companies as suppliers or customers and also are a good steward of assets – that’s very important,” Siadat pointed out.

SK Capital’s long-term holding period for businesses is also a rather unique and attractive aspect – for both sellers and employees.

“We have an ownership mindset versus an investor mindset. We think and act like we’re going to own these assets forever instead of using short-term financial engineering,” said Norris.

“We are willing and inclined to hold businesses longer than typical private equity, and also resource these businesses with talent, R&D and capital to execute with a long time horizon,” he added.

In October 2019, SK Capital acquired the Performance Products & Solutions (PP&S) business of US-based PolyOne for $775m, renaming it GEON Performance Solutions. GEON is a major compounder of polyvinyl chloride (PVC), polypropylene (PP) and other thermoplastic polyolefins.

SK Capital will seek additional acquisitions in the compounding sector, which is of particular interest. On 13 February, its portfolio company Ascend Performance Materials announced the planned acquisition of Italy-based Poliblend and Esseti Plast GD, bringing additional compounding and now masterbatch capabilities, though on the polyamide and engineered plastics side rather than vinyls in the case of GEON.

“We are steeped in this sector and proactively source opportunities. We identified GEON as interesting target and had a good relationship with PolyOne. We expected this asset would eventually be deemed non-core and were prepared when it was,” said Norris.

“We pre-empted the process and got to a signed agreement before others completed their due diligence,” he added.

SK Capital delivered a fully financed bid at an attractive valuation quickly – an important element for a seller that was also planning a major acquisition of its own, he noted.

“At the time, the financing market wasn’t strong and the US-China trade war was impacting sentiment. Taking away uncertainty was important,” said Norris.

After closing the sale of its PP&S business to SK Capital on 28 October, PolyOne on 19 December announced its planned $1.45bn acquisition of Clariant’s masterbatch business.

Corporates are also shifting towards narrower sale processes rather than broad auctions, benefiting those with deep industry expertise, said SK Capital managing director Mario Toukan.

“Boards are shifting their mindset and are more comfortable with narrower processes focusing on buyers with specific intent. For these, the bottom line is credibility to consummate the deal,” he said.

GROWTH STRATEGY FOR GEON
For GEON, SK Capital has built a new C-suite behind CEO Tracy Garrison, who was appointed in November 2019 and has a track record of building compounding businesses.

From a strategy perspective, management will run the company as one integrated unit, being material agnostic when it comes to PVC, PP or other materials – emphasising being a solution provider to customers.

“We will also move GEON towards a growth orientation. The business has not grown as it should have as much of the cash flow it generated was not reinvested. We will invest in this business meaningfully – in technology and innovation,” said Norris.

“We also plan to do M&A here as GEON is a great platform and there is a lot of fragmentation in this market,” he added.

“Compounding is a broad and fragmented market. There are lots of opportunities to build a multi-resin compounder, including recycled materials, to cater to OEMs,” said Toukan.

Whether through GEON or Ascend, SK Capital will continue to look for compounding and masterbatch acquisitions.

VALUATION GAP DRIVING CARVE-OUTS
A wide valuation gap between publicly traded pure play companies and their diversified counterparts will drive more corporate carve-outs in the chemical sector, said Toukan.

“For public companies, there is a lot of confusion on value. Investors don’t understand what they do if they are too diversified,” he said.

“We see an acceleration of carve-outs in 2020-2021 given the macroeconomic backdrop,” he added.

Chemical companies with more complex portfolios are difficult for equity analysts to understand as well, resulting in a valuation gap of around 2 turns (multiples on EBITDA) in favour of pure-play companies, Siadat pointed out.

“That’s why you see more activists getting involved and doing sum-of-the-parts analyses. If you’re proactive as a management, you try to do that yourself,” said Siadat.

“If you took all the business units of chemical companies, laid them on a table and arranged them, many don’t belong to the same parent. Over time, competitive dynamics from things like US shale gas, China domestic growth and trade have changed. To stay competitive, what made sense in the portfolio five years ago may no longer apply,” he added.

The chemical industry also goes through phases towards and away from vertical integration, noted Toukan.

“In the past, many companies wanted full value chains. Today, there is less of a desire for commodity and intermediates businesses attached to specialties,” said Toukan.

Along with compounding assets, other M&A targets for SK Capital are in sectors where its portfolio companies operate. These include nutrition, healthcare, engineered plastics, specialty coatings, textile chemicals, paper chemicals, additives, lubricants, oilfield chemicals and fire retardants.

“When we look at this, there are a lot of strategic types of acquisitions available – add-ons or adjacent opportunities. For example, we have around $1bn in lube additives sales across different business units. This is a good area for us,” said Siadat.

M&A VERSUS PUBLIC VALUATIONS
One challenge is that chemical M&A valuations have generally not come down in line with public valuations.

“They are not going higher but also not going lower as fast as they should,” said Siadat.

Publicly traded chemical companies that are not getting proper valuations should consider going private, he pointed out.

“Public companies are at the mercy of analysts and are often forced to do things that are not in the long-term interests. And some are undervalued because of a broad portfolio,” said Siadat.

“These companies should break up or go private. For SK Capital, we absolutely see these opportunities,” he added.

Interview article by Joseph Chang