NEW YORK (ICIS)--Private equity firm SK Capital will seek to build new separate platforms with the acquisitions of Baker Hughes’ specialty polymers business and Techmer PM, its managing directors said on Monday.
“Both deals are new platforms. We view these as real opportunities for organic growth as well as significant M&A activity,” said SK Capital managing director Mario Toukan.
On 27 July, SK Capital announced it has agreed to acquire Baker Hughes’ specialty polymers business, with manufacturing operations in Barnsdall, Oklahoma, US.
The US-based business produces specialty low molecular weight olefin polymers, including a range of differentiated functional polymers and premium, high melting point polyethylene (PE) waxes used as additives for plastics and in cosmetic formulations, among other applications.
The deal, and expected to close in the second half of 2020, is a “complex carve-out”, as it has no separate management team or infrastructure within the corporation.
Baker Hughes’ primary business is in oilfield services, making the specialty polymers business, with annual sales of under $100m, truly non-core.
“It’s a great backbone with high-end tailored solutions for customers in a variety of applications. We’ll look to augment executive leadership in a number of functional areas to enhance the existing team,” noted Toukan.
SK Capital had been in proprietary talks with Baker Hughes for almost a year on a potential deal, he added.
“The great aspect of this business is the unique technology and process which is valued by the market. There are segments we can better market to, but this is a real technology leader with a low molecular weight, high melt point waxes that can also have targeted melt points,” said Jon Borell, managing director at SK Capital.
“We are really interested in businesses that are solution providers to customers, that drive end-use performance,” he added.
TECHMER PM DEAL
About a week earlier on 21 July, SK Capital announced the acquisition of Techmer PM, a US-based producer of engineered compounds and colour and additive concentrates for the plastics and fiber industries with over $200m in annual sales.
The Techmer PM deal, which already closed, partners SK Capital with the company’s founder and CEO John Manuck, who will retain a significant ownership stake. The parties had also been in proprietary talks for about a year.
“We got to know them over the course of a year and made sure we’re aligned with their values and long-term strategy,” said Borell.
Even as the deal in principle was struck before the coronavirus outbreak, “we stuck to those terms. We didn’t use this as an opportunity to renegotiate,” he added.
EXECUTING DEALS IN A CHALLENGING
The Baker Hughes and Techmer PM deals are the first for SK Capital’s Catalyst I Fund which targets middle-market chemicals businesses.
“We were able to get these two deals done in this challenging environment where we have seen many other transactions over the past five months simply fall apart. We did this by over-equitising and tapping into close relationships with lenders,” said Toukan.
“For both transactions, we paid a fair price - not a discount given Covid-19 and the economy,” he added.
For financing, Cerberus supported the Techmer PM deal, while KeyBanc Capital Markets is supporting the Baker Hughes transaction.
In the past five to six years pre-coronavirus, private equity would typically kick in 30-35% in equity. However, with significant challenges in the debt financing market today, SK Capital had to add “materially higher” equity, Toukan noted.
“The financing market is still incredibly challenging so you need deep, decade-long relationships. There is a good amount of private equity interest in deals, but we don’t see many being able to execute,” said Borell.
Meanwhile, corporates are more proactively seeking to sell assets rather than make acquisitions, he noted.
“Both deals are pretty much proprietary transactions. We are among the most active chemicals investors that can provide certainty and full value for businesses. We leverage our expertise and credibility in this sector,” said Toukan.
Typical auctions of businesses should tick higher but not return to pre-coronavirus levels for some time, he added.
“We are very focused on the long-term strategic value of the businesses we invest in, so we can look through short-term choppiness,” said Borell.
SK Capital today is focusing on a smaller pipeline of higher quality, more actionable deals. Its “bread and butter” are corporate carve-outs and partnering with an entrepreneurial founder/owner, said Toukan.
“As a firm, all we do is chemicals, so we just have a lot of relationships that are fluid and close. That leads to much more organic conversations,” he added.
Interview article by Joseph Chang.