Univar seeks transformational growth with $2bn Nexeo deal

US-based chemical distributor Univar aims to become the premier global distributor of chemicals and ingredients with its planned $2bn acquisition of Nexeo Solutions.

“We have a tremendous opportunity to grow in a highly fragmented marketplace… We will have a broader, more comprehensive, more compelling product offering for our customers, and more reach for our suppliers,” said David Jukes, CEO of Univar, in a conference call with investors and analysts.

“We will have people able to prospect on more customers… to sell high, wide and deep 
in the marketplace. We expect this to augment our growth plan… This is all about growth,” he added.

With the deal, Univar will grow its US and Canadian chemical sales force from around 660 sellers to about 960.

This excludes the sales force of Nexeo’s plastics distribution business which will potentially be divested.

The combined sales of the two US-based distributors on a last 12 months basis is $12.5bn, of which around $2.0bn is in plastics distribution.

With the deal, Univar would remain the world’s second-largest distributor behind Germany’s Brenntag, which had €11.7bn ($13.7bn) in sales in 2017.

Laurence Alexander, analyst with Jefferies, calls the deal 
“a logical evolution for the North American chemical distribution market, albeit one with significant near-term hurdles ($100m of synergies, successful resolution of the plastics distribution footprint)”.

“This acquisition will accelerate [Univar’s] digital transformation and increase sales coverage while reducing asset footprint, and even without synergies 
appears to support a ROIC (return on invested capital) well above the average of chemical M&A this cycle,” he added.

Combined Univar and Nexeo earnings before interest, tax, depreciation and amortisation (EBITDA) in the last 12 months is $843m, for an EBITDA margin of around 6.7%.

Univar is buying Nexeo for $2.0bn, including the assumption of $949m in net debt. The $2.0bn purchase price represents an EBITDA multiple of 9.6x on a last 12 months basis.

Based on Wall Street consensus estimated 2018 EBITDA, the multiple is 9.4x.

Taking into account a planned $100m in synergies by the end of the third year of completion, the multiple drops to 6.5x, according to Univar chief financial offer Carl Lukach.

Univar will use a combination of newly issued stock and cash in the acquisition, expected to close in the first half of 2019.

Under the deal, Nexeo shareholders will receive 0.305 shares of Univar stock valued at $8.36 per share based on the closing price of Univar at $27.40 on 14 September, plus $3.29 in cash. The cash portion could be reduced by up to $0.41, depending on the price of Univar’s stock at the close of the deal.

This implies a value of $11.65 per share to Nexeo’s shareholders, or a premium of 16% to Nexeo’s closing price of $10.01 prior to the announcement of the deal on 17 September.

The plastics distribution portion of Nexeo Solutions comprises around half of Nexeo’s last 12 months sales of $4.0bn and a third of its $208m in earnings before interest, tax, depreciation and amortisation (EBITDA), according to the companies.

Based on this estimate, Nexeo’s plastics distribution business generated EBITDA of around $69.3m on $2.0bn in sales, for an estimated EBITDA margin of about 3.5%.

That puts the rest of Nexeo’s chemical distribution and environmental services EBITDA at around $138.7m, for an EBITDA margin of 6.9%.

Along with the $100m in annual operating synergies by the end of the 3rd year post closing, Univar sees $15m in annual run rate savings in capital expenditures, which would be achieved immediately.

And with over $375m in expected free cash flow in the first full year post closing, Univar expects to have a debt/EBITDA ratio under 3.0x by that time.

Jukes will lead the combined company as president and CEO, while Steve Newlin will continue as executive chairman.

PLASTICS DIVESTITURE

Univar is considering divesting Nexeo Solutions’ plastics distribution business out of a desire to stay focused on chemicals and ingredients distribution.

“We are going to have the comprehensive strategic review to look at the alternatives there,” Jukes said.

“But really we haven’t been in plastics, and we haven’t been in plastics because we’ve chosen not to be in plastics.”

Nexeo’s plastics business distributes prime thermoplastic resins and other products globally for original equipment manufacturers (OEMs), moulders and design firms.

And there is very little overlap between the chemicals and plastics distribution businesses of Nexeo, leaving little chance for “dis-synergies”.

Only 1-2% of overlap exists between plastics and chemical customers for Nexeo, Jukes said.

“The question really is: Are we the right home for this fantastic plastics business?” he said. “Because it would be a dreadful shame if it just sat for us as a non-core business, and missed out on the opportunities that are there.”

Univar noted Nexeo Plastics executive vice president Shawn Williams will continue to run the plastics business.