Deal, deal and more chemical deals….. "relationships and domain expertise are the key!"

M&A activities has slowed down compare to 2006/2007, the glory days of PE firms. The interesting thing is that most M&As are considered to be unsuccessful when we examine the write down (FASB 157 effect for PE firms), goodwill, amortization, cash crunch etc. for larger companies. Why or why not is the same old topic that I shall avoid for this discussion. The thrill of M&A transaction and being in the press can become a seduction for many managers and doing the deal then becomes a success in itself to boost his/her own ego. The fact is that if you know the underlying asset and business operational fundamentals, M&A could be profitable growth accelerator and high IRR for LP/investors.

In order to have a robust deal pipeline, one has to have a deep domain knowledge, expertise and relationships….

Just, knowing about a deal doesn’t do the trick, because really understanding the business and having meaningful relationships are vital. Here are a few recent deal/M&A dynamics in chemical industry:

1) Sell of Cognis is on the rumer mills for a very long time. There are many companies could have a strategic fit with Cognis such as Lubrizol. However, BASF is at an advanced stage of talks to acquire Cognis and may make a bid for the company next week, German press reports said. This follows last month's news that BASF and Lubrizol have separately expressed interest to Goldman Sachs Capital Partners and Permira, Cognis' owners since 2001, that they would be interested in buying the company. BASF has appointed financial advisors to assist with the potential transaction, sources say. Financial Times Deutschland reported that BASF's supervisory board has given the go ahead to bid for Cognis, citing people familiar with the situation. Analysts say an outright sale of Cognis, rather than the previously considered IPO, would be the right strategy for the owners. Private equity companies do not generally hold on to assets for 10 years and, in the case of Cognis, would favor a sale to a strategic buyer. The deal would be worth about €3 billion ($4 billion), reports say. Cognis, whose sales last year reached €2.6 billion, is the former oleochemicals business of Henkel. It is active in care chemicals, nutrition and health, as well as functional products. Cognis' main competitors in Europe are Evonik Industries, Croda, which in the past acquired ICI's Unichema oleochemicals operations, and BASF. All have had discussions about buying Cognis, reports say. Cash-rich Solvay could also be interested, following the sale of its pharmaceuticals business and its quest to expand into areas with a lower CO2 footprint. "I think it would make sense for BASF to buy Cognis," said Andreas Heine, an analyst with UniCredit Research. "This year is a good year for acquisitions.” In the case of BASF, the company has done most of the work integrating Ciba Specialty Chemicals already, he said. Cognis' portfolio would fit well with BASF's, he added.

2) Ticona Engineering Polymers, Celanese’s advanced engineered materials business, said it acquired two product lines, Zenite-brand liquid crystal polymer (LCP) and Thermx-brand polycyclohexylene-dimethylene terephthalate (PCT), from DuPont Performance Polymers. Financial terms were not disclosed. “This acquisition will continue to build upon Celanese’s position as a global supplier of high performance materials and technology-driven applications as we continue to expand our innovative offerings in growth-oriented segments to support our customers,” said David Weidman, chairman and CEO of Celanese. “These two products broaden the company’s Ticona Engineering Polymers offerings, enabling Celanese to respond to a globalizing customer base, especially in the high growth electrical and electronics application segments.” Zenite LCP and Thermx PCT posted revenues of about $40 million in 2009. “DuPont Performance Polymers has concluded that this opportunity to divest Zenite LCP and Thermx PCT is in the best long-term interests of our portfolio and customers,” said Diane Gulyas, president of DuPont Performance Polymers.

3) Chemtura said it has completed the previously announced sale of its polyvinyl chloride (PVC) additives business to Galata Chemicals for a price of $16.2 million and the assumption by Galata of certain liabilities including certain pension obligations and environmental liabilities. Galata is a partnership between private equity firm Aterian Investment Partners and textiles, metal finishing and chemicals company Artek Surfin Chemicals (Mumbai). “This divestiture was the best way for us to maximize the value of the PVC additives business,” said Craig A. Rogerson, chairman, president and CEO of Chemtura. “It is part of our plan to focus on maximizing the total value of our portfolio of businesses.”

4) Eastman Chemical is now reviewing options for its PET business. Eastman, once the world's largest manufacturer of this plastic, has been looking to largely exit this competitive and oftentimes oversupplied market. Eastman has

Eastman Chemical said it has completed its previously announced acquisition of Genovique Specialties, a global producer of specialty non-phthalate plasticizers, benzoic acid, and sodium benzoate. The acquisition includes manufacturing assets at Chestertown, MD and Kohtla-Järve, Estonia as well as a plasticizer joint venture site at Wuhan, China with Wuhan Youji Chemical Corporation. The operations will now become part of Eastman’s Performance Chemicals and Intermediates (PCI) segment. The transaction is expected to be accretive to Eastman’s full-year 2010 earnings per share. Terms of the transaction were not disclosed.

5) Many folks thought TPG, formerly called Texas Petrochemicals Group, might be a good target. Well,… it may not be viable anymore. TPC, said it has been approved to list its common stock on the NASDAQ Capital Market. The company’s shares are expected to begin trading under the symbol “TPCG” on May 4 when the market opens. “Achieving a national securities exchange listing was a key goal for TPC Group,” said Charlie Shaver, TPC Group’s president and CEO. “As we continue to successfully execute on our business plan, we believe this listing enhances value for our shareholders, as it should provide increased visibility within the investment community and improve the trading liquidity of our shares.” TPC, which is currently traded on the over-the-counter market, filed a registration statement with the U.S. SEC last January. The company recently amended and extended its revolving credit facility from $140 million to $175 million in late-April.

6) Ineos, haha ….

Ineos will raise funds through a bond issue, despite disturbance in the global money markets. Here are some interesting perspectives, according to some folks, I know: although the notes are senior secured, the bond weak since there is a significant amount of debt that is permitted to be incurred which will rank ahead or pari passu with these Notes, thereby diluting the collateral package granted to the Note Holders on the date of issuance. The notes are senior secured, but effectively subordinated to indebtedness under the revolving credit facility and the other first priority debt. As of June 30, 2009 the Notes are structurally subordinated to $7.1mm of debt of the non-guarantor subs. The notes are effectively senior to the other senior debt of the Company (including the outstanding senior notes) to the extent of the value of the Collateral. The Liens covenant is rated weak since it permits a significant amount of debt to be secured on a first priority basis ahead of the Notes. The Company has flexibility to incur additional first priority debt which will rank ahead of the notes and even greater flexibility to grant liens which are pari passu to the Notes, thereby diluting the Note Holders collateral package. You can get a pretty good idea if you see the Lien Covenant for Ineos.

The issue is intended to raise cash to refinance existing debt, Ineos said. The company announced plans to issue bonds in March to pay down debt. Ineos will offer a two-part bond issue, due in 2015. The aggregate principal amount is €740 million ($945 million): $570 is priced at 9%, and €300 million is priced at 9.25%. "The market is clearly encouraged by the recent performance reported by the company and its delivery ahead of its business plan," said Ineos Capital SFO John Reece. Ineos divested its ChlorVinyls and Ineos Flour businesses, which is expected to produce a total increase in liquidity of about €300 million, and a total reduction of net debt including pension funds liabilities of about €600 million. Ineos reported full-year 2009 historic cost Ebitda of €1.2 million compared to €594 million in 2008. The company expects its financial performance to continue to improve through 2010.


7) LyondellBasell: It’s good to see that LyondellBasell emerged from bankruptcy protection on April 30. The company is still highly levered with S&P rating being B. It’s worth of considering that the company’s total adjusted debt is $9.3Bn when you capitalize operating leases of $1bn, taxt effect and unfunded postretirement obligations, and environmental liabilities etc. There were some churn with senior management during the transition process.

LyondellBasell entered into bankruptcy with net debt of about $24 billion; it will exit with about $5.2 billion of net consolidated debt, reflecting about $2 billion of cash and cash equivalents; and about $2.4 billion of lending commitments under an asset backed lending facility in the U.S., as well as a European revolving trade accounts receivable securitization. A new parent holding company, LyondellBasell Industries N.V., was formed as part of the reorganization. It will be a public limited liability company incorporated in the Netherlands. Stock of the new parent company is expected to be publicly traded on the New York Stock Exchange in the third-quarter. About 563.9 million shares of common stock will be issued under the plan.


8) According to PEHub, Coskata Inc., a Warrenville, Ill.-based developer of technologies for processing biorefuse into ethanol, has secured an undisclosed amount of new equity funding from French oil company Total. The company previously raised over $76 million from Blackstone Group, Advanced Technology Ventures, Globespan Capital Partners, General Motors, GreatPoint Ventures and Khosla Ventures. The proceeds of the financing will support Coskata’s bio-ethanol commercialization activities while ensuring advancement of new product technologies. Also participating in the transaction was a number of Coskata’s prior investors. According to PEHub, Joule Biotechnologies, a Cambridge, Mass.-based developer of technology to convert carbon dioxide into ethanol, has raised $30 million in Series B funding led by Flagship Ventures.

9) Agriculture, fertilizer industry is on a role, especially in BRIC countries and most players have enjoyed up swing. UralChem, a leading Russian fertilizer producer, has postponed plans for a previously announced IPO in London because its "management and shareholder believe that in the current market conditions the offering cannot be priced at a level, which reflects a fair value of the company.” Dmitry Mazepin, chairman of the board of UralChem Holding and 95.5% owner, says that the IPO generated considerable demand by international institutional investors but the company was not satisfied with the valuation that could be achieved in the current market conditions. The company recently said that it was planning to float 40% of UralChem in the form of global depositary receipts (GDR), each GDR representing two UralChem shares. The London float would have raised up to $642 million and would have valued the whole company at $1.2 billion-$1.6 billion. The proceeds would have been used to pay down debt built up by a series of acquisitions since 2007. Reports claim that the prospectus failed to disclose significant legal actions against the company, and that the U.K. regulatory body, The Financial Services Authority (FSA), would not have approved it, which means that it could not be published.

10) A. Schulman, Inc. announced today that it has completed its acquisition of ICO, Inc., following the approval of the ICO stockholders at a special meeting on April 28, 2010. The transaction, first announced on December 2, 2009, provides for total consideration of $105 million in cash and 5.1 million shares of A. Schulman common stock. ICO is a global manufacturer of specialty resins and concentrates for rotomolding, and provides specialty polymer services, including size reduction, compounding and other related services. Its products are used to manufacture plastic bags and films, household products, toys, water tanks and other rotational molding applications. With the addition of ICO's operations, A. Schulman will strengthen its presence in the U.S. masterbatch market, gain plants in the high-growth markets of Brazil and Malaysia and add facilities in Australia. The acquisition also will allow A. Schulman to expand its presence in Europe by adding rotomolding and size reduction to its capabilities and further leveraging its existing facilities serving high-growth markets such as Poland, Hungary and Sweden.
11) Clorox announced its intention to divest its STP and Armor All brands, most likely through an auction. The two divisions last reported combined sales of $300 million, and it is thought that Clorox is looking for upward of $800 million. Deutsche Bank analyst Bill Schmitz commented that Clorox is, ”Looking at selling off slower growing brands to focus on building or acquiring faster-growing businesses, or to accelerate its share-repurchase program.”

12) Polymer Group (PGI) announced that it is “evaluating strategic alternatives” for the company, including a sale, merger, or recapitalization. PGI expects 2010 top line growth of 9-12%.

13) Total sold its Mapa Spontex consumer specialty chemicals business to Jarden for $449 million. Mapa Spontex is a manufacturer of baby-care and home-care products with leading market positions in Europe, as well as Brazil and Argentina. The deal forms part of Total’s strategy to refocus its chemicals portfolio on materials science, with products such as polymers, adhesives, rubber processing, and electroplating, the company says.

14) Battelle (Columbus, OH) and start-up firm Ferratec (St. Louis MO) say they have developed a manufacturing process that slashes the cost of potassium ferrate from about $100/gram to as low as $2/gram in research quantities. Ferratec is able to produce pilot-scale quantities of kilograms of the salt per day, but determining the capacity of a commercial-scale project will depend on how quickly markets adopt the new chemistry, says Andy Wolter, CEO at Ferratec. According to Wolter the “holy grail” of applications is the multi-billion dollar municipal water and wastewater treatment sector, but that is a highly commoditized market still out of reach, even at potassium ferrate prices of $2/gram. Walter states that, “Long before we get to price points competitive with chlorine or permanganate, [potassium ferrate] can be used as an oxidizer or biocide.” In this form, it has military, Homeland Security, pharmaceutical and Superfund decontamination applications, and can be used as a replacement for hexavalent chromium in conversion coatings

15) Sumco has put its Cincinnati, OH semiconductor wafer manufacturing facility up for sale and has hired consulting firm Atreg (Seattle) to facilitate the sale. The company, a JV between Mitsubishi Materials Corporation and Sumitomo Metal, is selling the facility because the industry is “moving away” from the wafer technologies produced at that facility. Atreg says it expects potential buyers to be alternative advanced technology users, including defense firms and battery and solar manufacturers.

16) Arch Chemical often viewed as the odd ball in the industry and getting smaller and smaller in foot prints …. They had some management churn in recent quarters and thankfully they were able to sell their money-losing coatings business (primary business is in Europe, Sayerlack-brand industrial wood coatings business, headquartered at Pianoro, Italy) to Sherwin-Williams in February $54 million. The unit reported sales of $147 million last year, and it will join SW’s global chemical coatings division.