AkzoNobel will sell its specialty chemicals unit to US private equity firm The Carlyle Group and Singapore’s sovereign wealth fund GIC for €10.1bn.
The transaction is expected to be completed before the end of 2018, with AkzoNobel expected to receive a cash payment of €8.9bn. “Following deduction of deal and separation related costs, as well as other previously announced liabilities, the net proceeds are expected to be around €7.5bn,” AkzoNobel said, adding that the vast majority of net proceeds will be distributed to shareholders. The company has said that a portion of the proceeds would be used to pay down pension fund obligations.
The separation of the specialty chemicals unit was overwhelmingly backed at an extraordinary general meeting in November last year. “Equity for this investment will come from Carlyle Partners VII, Carlyle Europe Partners IV, Carlyle’s longstanding investment partner GIC and co-investors,” it added.
MONEY RETURNED TO SHAREHOLDERS
The bulk of proceeds from the sale will be returned to shareholders, AkzoNobel said. The move to spin off the business was announced nearly a year earlier. Carlyle is paying its share of the equity out of its Carlyle Partners VII and Carlyle Europe Partners IV funds, and noted that there may be co-investors other than GIC on the deal.
“The board of management and the supervisory board concluded that a private sale to The Carlyle Group and GIC is in the best interests of AkzoNobel, Specialty Chemicals and its respective stakeholders,” AkzoNobel said in a statement.
Noting that it was difficult to say whether the €7.5bn figure represented a better than expected windfall, analysts Bernstein Research projected that around €6bn of that sum would be returned to shareholders, projecting that the company may earmark some funds for growth opportunities.
The company’s management said earlier this month that it sees a healthy pipeline of bolt-on opportunities, particularly for local coatings producers in China.
“[The purchase price] is in-line with our expectations for the deal,” Bernstein added in an analyst note.
Speaking to ICIS earlier this month, CEO Thierry Vanlancker – who ran the specialties division before becoming the head of the company last year – said that it has not yet determined whether the disbursal to shareholders in the form of a dividend or a share buyback.
The company has already paid out a €1bn special dividend out of its capital reserves in December 2017.
The €10bn purchase price represents 10 times EBITDA, a relatively affordable multiple compared to some of the valuations seen in recent chemicals sector mergers and acquisitions activity.
The business is a good fit for private equity ownership, as it is made up of four businesses – functional, industrial, surface and pulp chemicals – that could potentially be sold off piecemeal. At €10bn, the business could offer a 25% internal rate of return (IRR) over three years, the traditional hold period for private equity firms, with the scope for €200m of cost efficiencies, according to Bernstein.
“This business has been highly cash-generative, and this is extremely interesting for PE players and has an interesting consolidation story to it,” said Baader Bank chemicals analyst Markus Mayer in an interview with ICIS last month.
However, the sale deprives the rest of the company, now positioned as a pure-play paints and coatings producer, of a reliable cash generation engine at a time when multiple analysts have noted margin pressure exposure for the unit.
“I think the divestment or spin off of the specialty chemicals business is a short-term value generator, but I think in the long-term it will destroy value,” he added.
Other bidding groups were understood to include Germany-based peer LANXESS and several Dutch pension and investment funds, prompting speculation that the presence of a local partner or chemicals firm may be a factor in the bidding.
But Carlyle, which is the former owner of US paintings group Axalta and acquired former Total specialty chemicals subsidiary Atotech for $3.2bn last year, is an experienced manager of chemicals assets, according to Vanlancker.
“Carlyle has significant experience in the chemicals industry and a proven track record when it comes to health, safety, innovation and sustainability,” he said.
The market greeted news of the sale with enthusiasm, driving AkzoNobel’s share price up 3.4% compared to Monday’s close as of 11:21 GMT.