Ennovance Capital

Perspectives: What impact higher commodity price has on a chemical company?

2011-03-16T20:00:00.005-04:00

Whenever we discuss potential chemical investment, we frequently ask about the possible impacts that may result from higher prices for commodities such as oil, gas and other raw materials. As I am writing this blog, oil prices are around $98/bbl; a decade ago, oil prices were merely in the teens. Not surprisingly, some companies’ financial performances are impacted by their exposure to oil, gas and petrochemical-derivatives, yet many others have relatively limited and/or low exposure and are therefore better able to weather the storm - the trick is the ability to know the difference!

Few inputs impact the world economy to the same extent that the price of oil does. Oil powers cars, trucks, boats, airplanes, and even power plants, which make up the backbone of the global economy. Needless to say, higher energy prices will have an impact on consumers, as well as a company’s ability to invest in capital equipment and grow the business. Increased commodity chemical prices will place downward pressure on a company’s finance/debt as well as negatively effects consumers’ credit. From the feedstock to the commodity producer to the ultimate consumer, everyone suffers.

However, the magnitude of the impact depends on the company’s pricing power, business model, location in the value-chain, and uniqueness of their products and services. During an economy where commodity prices are rising, chemical companies’ financial performances may depend on their ability to pass along the increasing costs to customers (e.g. price escalators) and ultimately to the end-users. Hence, the management team’s ability to execute the company’s risk management strategy plays a crucial role!

The above chart provides a useful reference guide, illustrating the potential impact that certain commodity prices have on various products. Commodity chemical producers (e.g., SABIC, LyondellBasell), diversified chemical producers (e.g., Dow, Dupont, 3M), specialty chemical producers (e.g., Lubrizol, Milliken, Ferro, Solutia), agricultural/fertilizer producers (e.g., Monsanto, Potash), chemical formulators and service providers (e.g., Ecolab, Nalco), and chemical distributors (e.g., Univar, Brenntag) are influenced differently and to varying degrees of their margin. Some could even benefit from rising commodity prices. To say the least, the chemical industry is complex. Companies typically have a very long value chain, and very rarely can a company be found containing only one product line with just one end market. A savvy investor needs to possess a deep domain expertise in order to gain visibility into the value chain, take a broader view and appreciate the supply/demand dynamics.

One silver lining in this high crude price environment is that many commodity chemical producers are benefiting from relatively cheap natural gas, which is a key raw material for many products manufactured in the United States. Higher natural gas prices, in particular, severely diminish the competitiveness of the industry, as it uses natural gas not only as inputs for fuel and power, but also as a raw material and for feedstocks. Feedstocks for most petrochemicals are typically derived from either oil or natural gas (the U.S. chemical industry is the largest industrial user of natural gas, consuming one-eighth of the total natural gas demand). Oil prices, including heavy liquids (e.g., naphtha and gas oil), are determined in the global market. The price of natural gas (as well as liquid gas such as ethane, propane, and butane) is driven by local/regional supply and demand since it has inherent physical limitations moving over long distances. Many large energy companies are heavily investing in order to find ways to help alleviate this issue, for example, building liquefied natural gas (LNG) terminals. Overall, the price of a feedstock is largely determined by the price of oil and/or natural gas.

Another silver lining is that alternative energies like wind, solar, and geothermal, as well as alternative fuels like biofuels, ethanol, cellulosic ethanol and fuel cells, all see increases in demand when the price of oil increases, since oil is their principal competition – also keep in mind that fossil fuels are the main sources of environmental pollutions. Many chemical companies’ products and technologies will, in fact, benefit from an environment with higher oil or energy prices, since chemical companies produce critical materials for solar panels (e.g., PV thin-film, pastes, encapsulants, coatings, metallization, shingle roofing), components for wind energy system (e.g., carbon fiber, infusions, fiber glass, pre-impregnated materials/prepregs), materials for energy storage devices/systems, various solutions for next generation’s electric vehicles, biofuels, etc. High energy prices also spark other innovations, from industrial biotechnology and bio-plastics to fuel cells.

Arguably, chemistry is the essence of modern life, and as a result, the chemical and chemical-related industries will continue to thrive in any commodity-priced environment, so long they remain flexible.

Even Warren Buffet likes the "business of chemistry" ….another stamp of approval for chemical industry thorough acquisition of Lubrizol

2011-03-15T12:31:00.005-04:00

During the last few years, Berkshire Hathaway Inc. has made many investments in chemical and chemistry related businesses such as Nalco, Dow (Rohm and Haas), Great Lakes Chemical (GLK), Kaiser Aluminium & Chemical Corp. Sealed Air Corp, GSK, J&J etc. along with some petrochemical companies like ExxonMobile, ConocoPhillips, PetroChina and so on. Mr. Buffet’s notable commitment to the chemical industry is illustrated thorough Monday's announcement to purchase Lubrizol (LZ) for $135 a share, 28% above Friday's closing price! The consummate value investor, Mr. Buffet is expected to pay $9.7bn (which includes $700m in net debt) for the transaction. Even after paying a $30 premium (i.e. 28%) over the $105 closing price on Friday, Lubrizol transaction is priced at approximately, 7x 2011’s EBITDA and 5.4x 2012’s EBITDA.

Now if you consider today’s availability of cheap money in the capital structure, the WACC is no more than 8.5% (assuming at least 2x interest coverage with a realistic leverage 4.7x - 5x), Mr. Buffet is expected to generate top quartile returns (with a minimum Internal Rate of Return (IRR) percentage in the 20s within 3-5 years!).

We can talk all day long about the public market anomalies, various deal dynamics, and business related topics such as sustainability of margins in the lubricant additives value chain or excessive swings of commodity feed stocks (e.g. energy price, oil and petroleum derivatives). However, a company’s success will continue to depend on the management’s ability to control risk and take advantage of perceived market risks. For example, Lubrizol is a well managed company that poses an excellent profile of a “very good” specialty chemical company, growing its revenue consistently (for example: $3.4B in 2004; $5.4 in 2010), generating very strong cash flows and returns on capital, displaying a strong balance-sheet and flush with cash. We should also realize that Lubrizol has been increasing earnings at a compounded growth rate of 16% (at least for last 10 years; and Lubrizol's earnings growth has accelerated to over 25% per annum during the last 5 years).

Lubrizol continues to maintain its specialty status in a “so called commodity risk” environment by focusing on: its proprietary product (not necessarily patent protected product), mastering its product application for their customers’ system/process, delivering process/system monitoring services and maintaining overall strategic focus etc. (note: Relatively speaking, Lubrizol is neither capital intensive nor over reliant on R&D expenditure). Ultimately, Lubrizol’s strong performance over the years coupled with an excellent new owner should position Lubrizol to be even more successful as it moves forward. What are your thoughts?

Private equity environment continues to improve

2011-03-12T11:51:00.000-05:00

The private equity deal market has been quick to rebound in 2011. According to Thomson Reuters, merger and acquisition deals are already over $36 billion for the year-to-date and the value of deals are up 88% from last year. Analysts not only expect private equity investments to continue but they also expect the size of deals to increase as well, since the credit crisis hindered the purchase of cheap debt. Although the entire private equity market has vastly improved over the past year, the investments leading the way have been in the industrial industries (including chemical & chemical related businesses), health care, and real estate.

If we measure the composition of global transaction volume, capital raising, the dollar value of private equity exits, and total equity investment. Collectively, these four key components illustrate the most fundamental elements of the private equity market, and when they are indexed, one can observe that in the 3rd quarter the global private equity industry continued to rebound from the 2008-2009 recession as total equity investment in private equity transactions increase to a record $40.1 billion ($36.4 billion reported in the 2nd quarter and $17.8 billion reported in the 1st quarter). However, PE activity has not yet returned to pre-recession levels and the industry is evolving for the better as many funds/PE firms are winding down their operations.

The biggest benefit of economic downturn is that private equity firms or companies tend to lose focus or ignore inefficiencies in go-go days. A few new private equity firms continue to emerge and a few existing firms will emerge even stronger, but many will go away. A generalist investment approach for very large funds might have some particular relevancies today (return of cheap money, access to resources due to larger fund fees/scale), while the middle-market (and certainly lower middle market) needs more specialized and focused investment approach because resources are limited and the middle-market contains structural inefficiencies that are absent from larger, more liquid markets. Isn’t this a good opportunity for both private equity investors and business sellers working with specialized professionals?

Synergistic acquisition to promote innovation

2010-09-13T07:27:00.002-04:00

In January, BASF and LKCA (a subsidiary of Linde Group), announced that they would jointly market licenses and plants for the capture of CO2 from flue gases, and recently, with assistance from RWE Power, they have created (and successfully tested) a major breakthrough in carbon capture technology. The new innovative technology captures CO2 by means of utilizing new chemical solvents that can reduce energy input by about 20 percent. Furthermore, the new solvents feature superior oxygen stability, which reduces solvent consumption significantly, which consequently improves efficiency.

In the future, climate-capture technology will likely play a key role in generating climate-compatible power from coal, and this new technology process, once scaled up to large power plants, will reduce power plant waste gases and facilitate clean energy generation. In addition, as this technology should capture more than 90% of the CO2 contained in waste gases, a vast supply of recycled CO2 can be created and used for inputs in chemical transformations such as production of fertilizers. New plants demonstrating this technology are scheduled to be in operation by 2015, and the technology should be expected to be utilized commercially in coal-fired power stations by 2020. Ultimately, once this technology expands, there will be a significant reduction in the release of climate-damaging CO2 due to its successful capture and transport for recycling or sequestration.

So, why is this development relevant in the chemicals industry? And why is it relevant within the private equity industry? First, this development illustrates the strong motivations within the chemicals industry to become more environmentally sustainable while simultaneously reducing costs and improving efficiency. Furthermore, this new technology derived directly from the pooling of knowledge and resources from various firms with different areas of expertise; individually, the companies would likely have found development of this technology exceedingly difficult, however, when their resources were combined, breakthroughs were managed in rapid fashion. Similarly, in the private equity industry, companies are strategically acquired so as to enable such synergies to promote swift innovation and long-term value creation, and as this particularly example clearly illustrates, the broader chemicals industry provides a viable forum in which to initiate such developments.

Partner up with the seller: Preserve and Grow Capital!

2010-08-17T19:58:00.005-04:00

For the last 2-3 quarters, we have been experiencing the greatest psychological recovery in the recent history of economics and frankly, it’s hard to pinpoint the “Real Why”. While the stock market has improved to the benefit of some, the majority of Americans continue the struggle to meet their daily needs (for as expected, job recovery is slow). Recent market activity has been surreal; however, if you looked into the dreadful realities of bankruptcy proceedings during the last few years, last month’s “Flash Crash” in equities markets should probably have been expected. Moreover, “amend to extend” loans have surfaced, seemingly pushing the inevitable off well into the future.

Unfortunately, the fact remains that access to capital continues to be tight and typical private equity firms have heaped tens of billions of debt onto companies acquired from 2004 to the end of 2007—debt that is likely difficult to service, and certainly not cheap, which ultimately begs the question whether a traditional PE firm can afford such an increase in debt (or so called financial engineering). Therefore, we expect to see lots of opportunities in the middle market, certainly in the lower middle market; however, the real difficulties lie in determining how realistic the valuations of certain companies are. Valuations for bankrupt companies are often well below the ultimate auction rates of assets for many reasons. However, unreliable and yet attractive valuations could potentially open the window to big bargains; although there still exist enormous hazards if the buyer really does not know the business and its operational complexities, the opportunities are there for the picking.

It’s critical that PE firms look carefully into protecting the principle investment (downside) as the basic guarantee, without compromising the upside for all parties involved. This “win-win” approach could be achieved through implementing a creative structure for a deal. If the PE investor understands the business and its assets, it would still make a lot sense to go for straight equity deals. An industry focused, specialty PE firm could potentially move into growth/late-stage investments where growth capital is critical for a company’s success. In these cases, industry specialization will not allow a firm to negotiate better with the market, but will also provide a perspective that enables deeper understanding of market variability, condition, the visibility of a company within the market, and general day to day operations from a business perspective. For example: one could choose a convertible structure to get the coupon for 2-4 years, then convert them into equity at a pre-decided price and include an exit structure (with a built-in clause for claw-back, earn-out, etc., if the company does not perform as promised by management/owner/i-banker; … structuring is always specific to the business and market peculiarity of the deal) under which the PE fund’s stake is bought out by the promoters (or investment banker/ placement agent) or other investors. A structured deal could be a valuable tool when a PE investor is not comfortable with a sell-side investment banker’s projection on revenue and returns. The fact is that there are many ways to get things done so long as all parties take a “partnership approach” and a PE investor has deep understanding of a business and its operating domain!

Dealing with a PE investor who has deep understanding of a domain and its business operations allows a seller to get the well deserved full value of a business, to get the deal done quickly and to sustain a long-term relationship with all parties involved.

Lyondell Basell: Phoenix From the Ashes

2010-08-16T17:46:00.002-04:00

If there was a major blight on the outlook on the chemical industry in recent years, it was LyondellBasell Industries US operations filing for Chapter 11 bankruptcy protection in January of 2009. Although the company officially emerged from bankruptcy in May this past year, it was LyondellBasell’s reported second-quarter earnings that left little doubt as to the health of the company and the health of the industry. Time to time, a good company can get stuck with a bad balance-sheet (often imposed by so-called financial engineers), with disastrous consequences; as is often the case, these financial engineers do not fully appreciate the complexities involved in the operational facets of the chemical industry and are incapable of implementing changes that can truly benefit the company stakeholders.

LyondellBasell reported second-quarter net income of $203 million as well as sales of $10.4 billion (+7% QoQ and +40% YoY up), cash increased to $3.8B from and total liquidity is now ~ $5B and the EBITDA was $1.4 billion (Net Debt / LTM EBITDAR of 1.1x). All five reporting segments have done well; however, improved olefin and polyolefin margins coupled with a better cost structure have driven attractive results!

Evidently, LyondellBasell has emerged from Chapter 11 restructuring a much stronger company, particularly operations in the US; operating income in the company’s olefins & polyolefins in the Americas segment was up 123% from the year-ago quarter. Looking forward, LyondellBasell expects similar positive performances as the US ethylene market rebalances following several turnarounds. It will be interesting to observe how operating rates and margins going forward will be influenced once the increased capacity comes online in the Middle East and Asia. LyondellBasell is one of the world's largest independent petrochemical companies that resides in the commodity end (upstream) of the value-chain. However, one can nonetheless appreciate LyondellBasell’s remarkable rebound, which ultimately reflects the good health of the broader chemical industry and could potentially illustrate why now is the opportune time to invest within the industry: specific markets within the industry are rebalancing and opportunities for growth are widespread and plentiful.

Chemical Industry Merger and Acquisition (M&A) Activity Gaining Momentum

2010-08-10T15:24:00.002-04:00

In the first half of 2010, there has been a noticeable pickup in the level of M&A activity in the core chemicals industry. In fact, in the first half of 2010, there were more deals than there were in all of 2009; to date, there have been 23 closed deals in 2010 whereas 2009 saw only 20 deals for the whole year (and only 7 for the first half). In terms of actual value, the 23 deals in 2010 represent $29 billion whereas 2009 saw $25 billion in deals for the whole year. Median valuations multiples (i.e. EV/EBITDA multiple) are on the rise for deals within the industry this year, that is significantly higher than the 2009, 2008; however, actual transaction value remains lower than 2007. It seems that sellers are more focused in achieving their strategic objectives and buyer are more focused on the value (instead of multiples or price)....Everyone wins!!

Semiconductor industry (early in the supply chain) seems to experience a further gain along with the global manufacturing and chemical sectors’ continued advancement (at a slower pace). Housing and job growth was disappointing and employment recovery may take a very long time. On the other hand, inventory rebuilding of manufactured product is moving into a moderate growth phase. All of these data coincide with the major upswing in reported second quarter revenues and profits across the industry.

Not only has there been an increase in the number of deals, but they have been more focused towards smaller-scale transactions as opposed to large, transformative deals. This can be attributed to several factors, among which include the European Union’s Reach legislation, an expected increase in the US capital gains tax, as well as banks’ predilection to favor smaller deals that focus on add-on acquisitions as opposed to massive transformations. Furthermore, a good deal of M&A activity has been conducted by financial buyers as opposed to major industry players; in the first quarter of 2010, financial buyers accounted for only 6% of the M&A dollar value, which has since risen to 48% in the second quarter.

So, what does all this information mean for the industry as a whole and how can investors capitalize on these conditions? In terms of the chemicals industry, these figures convey a strong underlying value and demonstrate the beginnings of a vibrant recovery for the industry. Furthermore, in terms of capitalizing on investments, the data indicates that the market is leaning towards smaller, operational value-adding deals for numerous reasons, and it is an ideal time for investors to take advantage of this new, and probably lasting, development in a recovering market.

1H-2010 M&A Update Slide Link: http://www.slideshare.net/ennovance

Deadline for innovation or profit? An issue in venture capital world…

2010-08-10T11:40:00.001-04:00

Ennovance Capital is NOT is VC firm (i.e. Ennovance is a PE investor). However, I could not resist the temptation to share my perspectives on the VC landscape. Currently, numerous venture capital (VC) firms are experiencing the problem of facing end-of-life fund deadlines in a market that has seen difficulties in recent years. Many of the funds facing this problem were created during the dot-com bubble; from 1999-2001, over 1200 venture funds closed on approximately $179 billion. Many of these funds facing end-of-life deadlines retain companies they believe hold much potential and seek extensions of their funds for a year or two; however, many investors in Wall Street would rather exit as quickly as possible and take their losses from venture bubble investments. Apart from loss of potential profits, what are the other possible effects of closing these funds without extensions?

One impact of decreased investment that many neglect to mention is the adverse affect on multifactor productivity (MFP). In economic terms, multifactor productivity is a concept that measures the changes in output per unit of input. In other words, MFP exists when the output is greater than the sum of its input. In real terms, MFP reflects factors such as managerial skill, technological developments, reorganization of production, etc; in essence, it is a measure of innovation. If this venture funds are required to close and let up on companies with significant potential, we would witness a noticeable decrease in MFP, for these funds would be unable to commercialize novel ideas and innovations, create synergy between existing companies, restructure and reorganize companies to operate more efficiently, etc. Many bright ideas and innovations that could potentially transform industries will never see the light of day, which will prove to be a dire consequence towards society as a whole.

Just as Rome wasn’t built in a day, companies cannot be transformed overnight. Although the market as of late, although improving in some regards, has been less than comfortable for investors, they should not give up on funds with potentially valuable assets too quickly. The key questions to ask are: Will novel ideas will remain novel ideas despite capital market conditions? Isn’t innovation made America great? If so, how big of a “real loss” would we see as innovation fades away due to general uneasiness within the market for VC?

Chemical Industry Going Green By the day

2010-08-09T08:36:00.001-04:00

Recently, chemical industry leaders BASF and Dow Chemical Company have received recognition from the U.S. EPA’s annual Presidential Green Chemistry awards for creating economically viable and sustainable technologies. Specifically, Dow and BASF won the Greener Reaction Conditions Award for their joint development of an environmentally friendly process for producing propylene oxide via hydrogen peroxide, which reduces waste water by about 75% and energy use by 35%. In the past, BASF has won the award 3 times, Dow Chemical 6 times, and other leading companies such as Merck & Co. have also received this award.

You may be asking why this is important and what impact does it have at all in the chemical industry? True, receiving this award will not likely have a significant impact on the companies themselves; however, it serves as an indication as to the direction of the broader chemicals industry and helps rectify pervasive misinformation about the industry. If you were to ask the average individual what they imagine in association with the words ‘chemical industry’, they will likely imagine immense factories spewing endless amounts of smoke. However, people fail to realize that the interests of chemical companies often align with what is best for the environment. Most importantly, folks fail to recognize that chemistry is essential to modern life;… sectors like pharmaceuticals/healthcare, electronics, personal & beauty care, home and building material, battery and energy storage system etc. depend on the basic science of chemistry. Many innovations that stem from this mentality often end up being beneficial for the environment in terms of fewer by-products, less usage of oil and gas inputs, and more. I am not saying that chemical industry processes are good for the environment in general, but that there is a conscious effort within the industry to become as efficient as possible and minimize impacts to the environment.

In essence, the industry has been ‘going green’ per se, and this effort by leading companies to innovate so as to develop environmentally sustainable and benign processes and products is exactly the mentality required, and will ultimately lead to greater efficiency and more sustainable/consistent growth within the industry, given the proper investment into these novel ideas.

Apollo's hunt for Pactiv

2010-06-02T21:30:00.001-04:00

Pactiv is in talks to be acquired by Apollo. The packaging company is estimated to be valued at over $4 billion, and its sale would be one of the largest deals in the packaging sector in recent years. Georgia-Pacific and New Zealand’s Rank Group are also reported to be in the bidding. The packaging sector had been consolidating over a decade and the question is whether cost synergies would be enough to warrant a merger and longer-term holding period or it’s a game of oligopolistic pricing model?

Anyway, the potential winner could be Apollo because of the synergy benefit with its current portfolio company Berry Plastics (current sales ~$4.1 billion) and massive nature of consolidation to provide better economies of scale! In 2006, Apollo has Berry for $2.25 billion (~7.1x EBITDA), which have been built through 29 acquisitions, most recently Covalence Specialty Holdings and Pliant Corporation (for 7.6x EBITDA). Berry is the #1 producer of injection molded products for the packaging industry and the #2 film and sheet producer (yes, the combined company would be the largest user of polyethylene ~1.3 billion pounds annually!!). Commoditized plain vanilla packaging industry, Apollo wanted to double Berry’s revenue every four years, and it might be possible given its acquisition history and sector specific characteristics such as: participating companies' currently have high cash flows, historically low debt levels and are trading at relatively low valuations etc.

Apollo could potentially buy many other candidates in this sector such as Silgan that has a low debt level and stable cash flow, though one third of its shares are owned by its founders. The question is, couldn’t a private equity firm generate extra-ordinary profit for its investors, with longer-term holding period, if the organization has specialized knowledge about a particular sector and understand profit chain? How important is the true multiple expansions?

Solvay- using its cash hoard for an acquisition?

2010-06-02T20:31:00.001-04:00

While its outlook remains challenging, Solvay reported a strong set of results for Q1-2010, especially a volume jump in its Plastics division and good progress in pulp & paper, construction business etc. Solvay has cash to spend after selling its pharmaceuticals business last February and a redeployment of its cash proceeds likely near-term. The question is where?

There are many possibilities for Solvay’s acquisition: Croda International and/or Symrise which are relatively stable; on the other hand, Solvay could buy one of the struggling companies like Arkema, Clariant, Rhodia, and Umicore etc. The real question is: would Solvay act to transform the company (risky) to be a major long-term value player or will it just satisfy the street/market by looking at the short-term (safe) benefit?

Quick perspectives on chemical related M&A deals: uptick in Q1-2010

2010-05-12T00:23:00.003-04:00

The economic downturn has adversely affected almost every industry and the shrinking demand for acquisitions depressed valuations for selling companies to their lowest levels in recent history that drove M&A activities to crawl. While no one can be certain what the immediate or long-term future holds for M&A activity, we are beginning to see empirical and anecdotal evidence that 2010 might get better for chemical and related industry deals. Until the general economic climate improves, or at least stabilizes, there is little reason to believe that financial and strategic buyers will jump back into acquisition mode. Here are some perspectives to consider:

Both the volume and value of deals within the chemical industry has increased markedly from the fourth quarter of 2009 to the first quarter of 2010. As measured by value, deal activity during the first quarter of 2010 increased by $15 billion, from $7 billion to $22 billion. While this increase was fueled mainly by five large deals, which accounted for 80% of the total activity, deal-making across the value spectrum is expected to increase throughout 2010. Cross-border deals are also expected to increase from 2009 to 2010, as the global economy continues to recover.

Two hundred sixty deals were announced during the first quarter of 2010, representing a 33% increase from the same quarter of 2009. While the number of deals announced dropped from 292 in the fourth quarter of 2009, the 262 figure does not accurately reflect the true deal volume during the first quarter, as it has been taking longer for interested parties to reach the announcement phase of deal negotiations.

During the first quarter of 2010, the proportion of deals by value involving financial investors continued to drop– 11% compared to a peak of 20% in 2007. By actual deal size, finical investors were only involved in $2.6 billion worth of transactions, as compared to $26.1 billion in 2007.

As access to credit continues to improve, private equity buyers are expected to reverse this trend. In fact, one of the largest deals of the first quarter, valued at $1.63 billion, was the acquisition of Styron Corp by Bain Capital, announced in March. However, for the moment, strategic buyers still retain a competitive edge over purely financial buyers.

Consolidation and increased competition within the industries are expected to be the key drivers behind strategic deals, with a focus by acquirers of achieving cost and operational synergies in their core businesses. Additionally, the opportunity to acquire companies that remain financially distressed is still present.

As a result of the focus on strategic deals, many sales have either resulted from direct discussions between the two participants or have been conducted as auctions in which the number of bidders has been intentionally restricted. Due to the effects of the recession on reported earnings over the past few years, the complexity of conducting an accurate analysis of potential targets has increased significantly. Combined with the private nature of most recent deals, it is of the utmost importance that prospective acquirers conduct thorough up-front research and have the experience to fully understand the industry, so that they are ready to act when deal opportunities present themselves.

Looking forward, the need for a complete understanding of target companies’ operations will be amplified by increasing uncertainty in the chemical industry. This uncertainty will be driven by commodity price volatility, as well as government actions concerning health-care and climate change.

We may agree after this latest downturn, private equity firms and traditional strategic/companies should be keen to understand the target’s business fundamentals, it’s relevant market/customer to avoid next disasters. Operational intelligence, domain expertise and alignment of interests would be the critical “must have catalyst” for sustained success. The question to ask, if a generalist PE firm have the necessary skills to produce higher IRR that LP/investors are demanding?

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

2010-05-11T15:35:00.004-04:00

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.

Water - a mega trend and multiple opportunities

2009-07-05T05:58:00.001-04:00

There is a plenty of water, but not where people want it. At the same time, the between surface water (renewable) and water from aquifers (may not be renewable) tends to be blurred. The fundamental driver for water related investments is the opportunity to ease the pressure for people migrate as water availability changes and the associated cost by easing the access of water! Water demand tends to grow 2x the pace of population growth and the supply of freshwater is relatively fixed and unevenly distributed.

Water sector is very complex and investors are drawn in by combination of large markets and powerful secular themes such as: population growth, rising water consumption per capita (e.g. USA personal consumption increased approx. 10x per capital in 20th century), aquifer depletion, increasing scarcity of supplies of fresh water and even climate change as the recent hot topic! There are many chemical and related companies are making big bats to benefit from the water needs and the question is who would be future winners? Would not keep your eyes open to the disruptive technologies and unsustainable trends that may turn a leader into a loser?

Shortage of water is creating an active consideration for the placement of chemical facilities. For example, water intensive operation such as coal-to-olifins (in China) or ethanol (in USA Midwest) could create water stress that will create a significant cost component for many industrial companies. Now, this could create opportunities forward thinking companies who have clear strategy on water savings as a broader value proposition (e.g. ability to extract methane from dairy firm wastewater may provide an attractive opportunity to benefit from reducing both downstream pollution and dairy farm energy cost!).

Chemical companies who are in Agricultural business could also change the game if they can create a winning value proposition “…more crop per drop”

Infrastructure related water companies would also benefit such as storm-water system, smart water metering and loss prevention solutions. Rising energy cost is threatening the economics of desalination and innovation in high yielding plant, process might be important. New technologies particularly using reverse osmosis membranes appear to be more competitive than previously.

Industrial water treatment would have to focus more on energy efficiency, process optimization and conservation. The unique ability to combine chemical treatment, mechanical equipment and services, and/or emerging technologies might open opportunities for new entrants for this market. The big question is, how will the supply-demand be balanced in light of global politics?

Perspectives on Clean Technology

2009-07-05T04:28:00.004-04:00

In recent times, there is buzz on “Clean Technology” and everyone chasing to get their slice of the pie. I thought, it would be nice to share some perspectives. Shifting political incentives, credit concerns, funding pressures, persistent energy price volatility, capacity concern and pace of innovation would be the continued theme for 2009!

Climate change threatens to derail development, while business-as-usual development threatens to destabilise the climate. While the debate over climate change appears largely settled, managing this tension will involve a lot more reflection about the trade-off between growth, the mitigation of climate change, adaptation to its effects and delivering alternate/clean-technologies.

Clean Technology is often viewed as a euphemism for alternate energy (i.e. oil or fossil fuel substitute), the fact is “Clean-Tech” includes a wide range of industries and business models that could potentially benefit from secular trends in favor of more efficient use of resources. Effective and efficient use of natural resources are critical due to the global mega-trends such as population growth, climate change, high demand for food, water and energy etc. Chemistry is the essence of modern life and the key players in chemical industry could benefit significantly in “Clean-Tech” in supplying key components or technologies. The key areas to focus on: Solar, Biofuels, Bioplastics, Fuel Cells, Water, Wind, Green Chemistry in general, Battery Technology, Carbon Sequestration, nano-tech or nano-scale high performing materials, and project base financing model etc.

Clean-Tech is not similar to “internet or dot com” where each new user at low incremental cost added more value to whole (after the initial heavy capital deployment); in contrast, dominant players in Clean Technology will be the companies who can execute successfully on a “project basis innovation”. Of course, there are few exceptions life biotech traits or smart metering etc.

A few thoughts on the clean technology arena: (i) I believe, speedy innovation oriented companies will benefit more than manufacturing (high asset) oriented companies. For example, ethanol plant operators versus enzyme suppliers. (ii) Carbon sequestration is a long-term play and the success will depend more on political climate, competing claims on invested capital and available alternates of technology (iii) As a general rule, regulatory initiatives should be the main driver for the financial return or performance of “Clean-Tech” participants (iv) Consumers price of traditional energy (e.g. electricity, gas, diesel, coal price) would dictate the viability of alternate energy or “clean-tech” (v) Arbitrages of elevated commodity price and alternate new technology has to balance out. Government policy will play a key role in commodity price such as corn price to gold price to hydrogen price! (vi) New technology could seduce people like (or, you), “Clean-Tech” funding arrangement are highly uncertain due to high level of capital intensity or ongoing financial commitments for many of the focus areas (not much difference than the feed-in tariff subsidy model). Clean-tech industry and their investment are undergoing a period of transition. Capital markets providing financing to the industry have pulled back in light of ongoing global macroeconomic, credit and liquidity issues. For example, in the first quarter of 2009, they invested only $154 million in 33 young companies, a drop of 84 percent from the last quarter of 2008 when, despite the crumbling economy, they invested $971 million in 67 start-ups, according to PWC/NVCA National Venture Capital Association. This reversal has led to a debate about whether market forces see little future for alternative energy and other green technologies on a large scale, or whether the economic downturn is taking its toll on this industry as well. The debate comes down to this: has the green bubble burst?

The debate over regulatory initiatives in only the beginning and low-carbon or energy-efficient technologies could see an accelerated adoption cycle in the appropriate environment. The Senate Energy and Natural Resources Committee last month approved the American Clean Energy Leadership Act by a vote of 15-8, clearing the way for the bill to come to the Senate floor for debate. While the bill is unlikely to pass in its current form, a few changes found to be relevant for the clean tech industry (i) Overall renewable targets are the same as in prior versions, starting at 3% by 2011 and climbing to 15% by 2021. It appears that energy efficiency can still be used as an offset to renewable target obligations at levels close to those previously discussed (e.g., 26.67%), suggesting that the net renewable requirement for 2021 would be about 11%., next (ii) the Act that was reported out of committee appears slightly watered down from a prior version, which was already not very aggressive on renewable compared to the House bill (Waxman-Markey). However, the bill does include a key positive for energy-from-waste and its exit from committee does set the stage for a bill to move the debate to the Senate floor, where additional changes could strengthen renewables requirements, possibly with more concessions to
nuclear energy and fossil fuels. (iii) The issue on combining the bill with carbon cap-and-trade legislation and it would be interesting see the final outcome!

As we observe various players in “clean-tech” arena, some of the questions I would ask:
Ø Can the “Clean-Tech” companies deliver sustainable profit in absence of without ongoing government/regulatory support? (Note: Clean-tech companies bears most of the risk instead of the suppliers. Many chemical companies are component and technology supplier to the so-called “Clean-Tech” companies such as enzyme to ethanol supplier, Photovoltech or thin-film supplier to Solar Panel Manufacturers )
Ø Are the new clean technology companies competitive in absence of scalability or migration to next generation?
Ø How sustainable is their pricing power? Can they capture their fair share of value, volume and market?
Ø Can “Clean-Tech” companies de-risk project for high capital intensity? In absence of “de-risking” the project, can they continually originate their financing?

Why doesn’t a PE firm do well in Chemical business?

2009-06-19T04:49:00.000-04:00

Chemical companies were always considered a very good credit risk, given their cash flows and fixed assets as well as diversification through their cross-border activities. Except for liability lawsuits, very few large chemical companies ever went bankrupt. Even highly leveraged large transactions were successful — from Union Carbide in the 1980s to the Gordon Cain transactions and the more recent acquisitions of Nalco, Celanese (lucky deals) and LyondellBasell, Hexion/Huntsman (not so lucky deals).

The fact is typical private equity firms (even Bulge Bracket firms, let alone middle-market buy-out firms) do not do well with chemical company investment due to their: i) short-term focus [“catch me if you can” mentality] ii) lack of understanding of complex chemical business where financial engineering may not be enough iii) timing the economic cycle often difficult and IPO may not be an easy exit strategy.

I believe, one of the key criteria to be successful in chemical industry is to maintain TRUST and long-term relationship. Traditional private equity often only focus on low price of a chemical business (say 4 to 6x EBITDA range) instead of the long-term value of a business. At the same time, the level of distrust among traditional Wall-Street players are more than ever, causing problem to raise reasonable debt. While many other sector players are paralyzed and remain static, the chemical industry folks are busy in debt raising or financing due to good fundamental and here are a few examples.

Ashland Chemicals (ASH) announced a few weeks ago to issue $600 million of unsecured senior notes due 2017. ASH will use net proceeds from the offering along with free cash flow generated (which we estimate to be $383 million in 2009) to retire the $750 million 9% bridge loan facility that is set to mature and roll over to an exchange note (at a likely even higher interest rate) in November of this year. By taking out the $750 million bridge loan before maturity, ASH can prevent it from potentially being rolled over to an exchange note that we believe would likely bear interest in the 12-14% range. While the ultimate impact of the pending debt offering on ASH’s interest expense is yet to be decided, we believe that it 1) reduces ASH’s financial risk, 2) eliminates the near-term maturities that were weighing on the stock, and 3) could potentially even result in a lower interest expense going forward.

Nalco Chemical Company (NLC), has issue $500 million aggregate principal amount of 8 1/4% senior unsecured notes due 2017 (the "Notes"). The notes will be issued at 97.863% of the principal amount to yield 8 5/8%. Nalco Company intends to use the net proceeds from the offering, along with proceeds from new credit facilities, comprised of a seven-year $750 million term loan credit facility and five-year $250 million revolving credit facility, to repay outstanding debt.

DOW Chemical (Dow) reduced its financial leverage, shrunk its near-term debt obligations and eliminated its extremely expensive perpetual preferred notes with the issuance of $2.25 billion of equity as well as $6 billion of longer-term debt.

Rockwood Specialty (ROC) has successfully completed an amendment to its credit agreement, allowing the company additional financial flexibility through its covenants, and extended maturities of its Term Loan E and Term Loan G, however all this did come at a price. Rockwood has amended its leverage covenant definition and level from Total Debt/ EBITDA of 4.25x to Senior Secured Debt / EBITDA of 4.40x, stepping down to 4.00x by the end of 2010. I believe, the credit agreement was little pricy, $8.7mm in one-time upfront fees (keep in mind that ROC was owned by KKR and it was highly levered during IPO…. Very similar to Nalco). This adjustment leaves the company significant room under the covenant--well beyond what is needed in this economic/earnings environment and gives them room for acquisitions if the opportunities arise. 2009 EBITDA estimate (excluding FX gains and losses) is $530.1mm. Next, Rockwood will extend maturities of $1.22 billion of Term Loan tranches E and G to May 15, 2014 from July 30, 2012.

More hunger ….; Are agri/food prices more likely to rise or fall?

2009-06-19T03:33:00.003-04:00

While prices have stabled/reduced, we all can remember (or hope not to remember) 2008’s extra-ordinary price hike of food/agri products due to the imbalance in supply and demand. We blamed the commodities like corn, energy etc.; however, the prospect for rising prices is still relevant today. I believe, there is a structural change story in the agricultural sector that will probably continue to affect food price, let alone world’s continued hunger issue. The bottom line is that we think agricultural prices are more likely to rise than fall.

While we recognize global demand for agricultural produce will likely suffer a cyclical downturn this year (a contraction of 1–2% in near-term) as both food and biofuel demand falls; however, the degree of the likely supply-side contraction will outstrip because falling planted acreage, lower fertilizer application and adverse weather conditions may drive a 3–4% fall in crop production over the near-term that is in contrast to the optimistic view of supply held by the USDA. Global population growth is expected to be 1.2% p.a over the mid-term (say 5 yr.) and continued increase in calorific intake and shift in dietary trends (greater meat consumption), which adds a further 1% p.a to global food demand. The UN estimates that some 1.9bn hectares of land worldwide have been affected by land degradation. The main causes are soil erosion, loss of nutrients, damage from inappropriate farming practices and the misuse of agricultural chemicals. Urbanization is eating into
agricultural land and reducing the workforce available to farm it. The average population size of the world's 100 largest cities grew from around 0.2m in 1800 to 0.7m in 1900 to 6.2m in 2000. Currently, half the world’s population lives in urban centers, compared with less than 15% in 1900. By 2030, the UN forecasts that 60% of the world’s population will live in urban areas. A major exporter like Brazil is increasing agri production; however, there is limit due to the major cap being poor infrastructure.

In the medium term, the supply/demand balance is expected to be fairly well matched (i.e. relative down-cycle again). All the participants in the value chain tend to be clearly very pro-cyclical when it comes to financial performance (e.g. crop processors and producers, Crop protection and seeds producers, fertilizer company, food retailer, Agri machinery producers), the key question is, what are we doing different now, structurally, to deliver cost-effective food/agri supply to feed the world’s growing population?

… Saga of Apollo/Hexion and doing wrong to Huntsman Chemical

2009-06-19T02:22:00.001-04:00

You may remember, the takeover of chemical maker Huntsman Corp (HUN.N) agreement struck in July 2007 was among the last major leveraged deals signed during the boom ($6.5 billion deal). When the global credit markets froze up, it became impossible for Deutsche Bank and Credit Suisse to syndicate the deal's heavy debt load. Apollo sought to cancel the deal, and Huntsman later sued to complete the sale. Huntsman sued Wall Street's biggest players and already won a lawsuit and later agreed to settle the dispute with Apollo for a $1 billion payment. Huntsman is now suing Credit Suisse Group AG (CSGN.VX) and Deutsche Bank AG (DBKGn.DE) for more than $4.6 billion in damages for their role in the deal.

Those of us know, Peter Hunsman, could understand that he never would have agreed to sell company founded (1982) by his father if he thought the banks and Apollo would wiggle out of their commitment.

If you dig deep, Huntsman never trusted Apollo (or any private equity in that matter), but went along with the deal since two of Huntsman's primary lenders were chosen to back the financing (and Huntsman had a great deal of trust with these two banking institutions Credit Suisse and Deutsche Bank). On the other hand, these two banker were chosen by Apollo to woo Huntsman management away from Dutch chemical company Basell (a formative contender). The trial of Huntsman against two banks has begun on last Monday and it would be interesting to see the outcome? Will the justice be derailed in cumbersome legal process?

Can main-street folks trust Wall-Street? Do you ever wonder, why most private-equity firms do not do well in chemical industry transaction?

Is Biodiesel market marked by uncertainty?

2009-05-11T02:12:00.000-04:00

The biodiesel market in the U.S. faces important issues; however, biodiesel is a key component of a sustainable future, and the industry will have overcome many challenges. U.S. and global demand for biodiesel has soared in recent years, but growth slowed in 2008 as energy demand and petroleum-based diesel prices fell. U.S. biodiesel production in 2008 rose nearly 40% to 683 million gals, as soaring U.S. exports, mainly to Europe, more than offset a drop in U.S. demand, according to the Energy Information Administration (EIA; Washington). Considering current economy, it’s not a surprise that U.S. domestic demand fell 8% year-over-year in 2008, to 320 million gals. A surge in biodiesel capacity and production was caused by biodiesel mandates under the U.S. Renewable Fuel Standard (RFS), higher fuel prices over the last few years, and a $1/gal biodiesel tax credit, EIA says. The European Union recently imposed tariffs on biodiesel imports from the U.S., which could limit U.S. exports, and EPA has not issued rules for implementing biodiesel blending requirements under RFS, which creates uncertainty for market players. While world capacity and consumption of biodiesel grew on average by more than 50%/year from 2002–07; however, the outlook for the biodiesel market this year remains highly uncertain!

Evonik Starts Up Operations at U.S. Biodiesel Catalyst Plant (May 4, 2009), at its 60,000-m.t./year sodium methylate unit at Mobile, AL. Sodium methylate is a catalyst used to manufacture biodiesel produced from sources such as rapeseed or soybean oil.

On the other hand, a number of Biodiesel/Ethanol producers have filed for Chapter 11 protection; such as:

White Energy Inc. : (Reuters) - Ethanol producer White Energy Inc filed for Chapter 11 protection in a Delaware bankruptcy court on Thursday, citing adverse market conditions, court documents showed. In court filings, the company said that while cost of raw materials to produce ethanol were high, excess supply of ethanol in the market has kept ethanol prices low, resulting in “minimal or non-existent profit margins.” White Energy listed assets and liabilities in the range of $100 million to $500 million in its Chapter 11 filing.

Aventine Renewable Energy (April 08, 2009): Aventine Renewable Energy Holdings Inc. of Downstate Pekin became the latest U.S. ethanol producer obliged to seek Chapter 11 bankruptcy protection Wednesday, as the industry’s once-fat profit margins continue to shrink. Ethanol, an alcohol product made from corn and used as a gasoline additive, got a major boost a few years ago from government regulations designed to encourage use of the product to reduce the nation’s dependence on petroleum. ….

Panda Ethanol (Jan. 28, 2009): Dallas-based Panda Ethanol Inc.’s Hereford Biofuels subsidiary filed for Chapter 11 bankruptcy protection in U.S. Bankruptcy Court for the Northern District of Texas.

According to the company, it intends to sell its major asset—a 105 MMgy ethanol facility currently in the late stages of construction in Hereford, Texas—pursuant to a Section 363 sale process, pending approval by the bankruptcy court. The bankruptcy filing doesn’t include the parent company of the Hereford subsidiary, Panda Ethanol.

Verasun (Nov. 5, 2008): VeraSun files for Chapter 11 bankruptcy protection; The recent retreat in corn prices caught one of the nation’s largest ethanol producers offguard. VeraSun Energy Corp. and its 24 subsidiaries filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court in the District of Delaware on Oct. 31, allowing it to enhance liquidity while the company reorganizes.

According to the company, the filing was “precipitated by a series of events that led to a contraction in VeraSun’s liquidity, impairing its ability to operate its business and invest in new and expanding ethanol facilities.” In a statement, the company said it “suffered significant losses in its third quarter financial statement,” citing that a dramatic spike in corn prices attributed to its corn procurement and hedging arrangements resulted in “unfavorable operating margins.”

Many other biodiesel producer are struggling to survive and the the question is what is next!

Refinancing shortfalls could trigger more M&A (and a lot more acquisition opportunity)

2009-05-11T01:28:00.000-04:00

Many companies need to divest assets for additional liquidity; innovative and brave entrepreneurs could pick up good business with a reasonable valuation. There are some interesting financing aspects to trigger more M&A activities in chemical market. In normal times the debt markets typically favor the chemical industry, because it has good cash flows. For this same reason, many bulge-bracket / larger private equity firms enjoyed acquiring chemical manufacturing companies. However, the continued credit crunch and related liquidity crisis are causing problems for many chemical companies that need to refinance or restructure debt. General industry is affected by several issues such as: earnings and cash flows are down because revenues/volumes are down due to the economic downturn, limited credit availability to adequately finance of ongoing operations, working capital, refinance of existing maturing debt, and the capital market is reluctant to deploy equity for weaker companies. Companies with decent credit that couldn¹t roll over their debt are the real tragedy, because they wouldn¹t be having such problems if not for the credit crisis. Getting either debt or equity financing currently is challenging for all but investment-grade companies, because the economic downturn has been more severe than usual and the credit crunch is exceptionally severe. Overall chemical debt issuance is down dramatically (e.g. $18.8 billion in 2007 to $11.1billion in 2008), and willing banks are seeking terms that are much tougher and expensive than in the past. For example, the high-yield debt rates could be in the range of 17%-18% (a historic high)!

Some high-profile chemical industry bankruptcies, most notably those of Chemtura and LyondellBasell Industries, demonstrate the difficulties facing chemical makers as profits and debt financing options disappear. Highly leveraged companies are in the worst position, but the difficulties are widespread.

It would be interesting to see what happens some of the high levered chemical companies like Hexion, Momentive, Rockwood and so on.

W.R. Grace is probably having difficulties in obtaining credit may force it to delay its exit from bankruptcy if current funds are not sufficient to fund its operations until its bankruptcy plan is approved.

Ineos has requested an extension to the debt covenant waiver that the company agreed to with its creditors last December for an extension of the waiver until July 17, because the original waiver agreement was for six months and is due to expire this month. Creditors will probably comment on the request by May 22.

Chemtura get a little help on credit because U.S. Bankruptcy Court for the Southern District of New York has granted final approval of Chemtura’s $400-million, debtor-in-possession (DIP) credit facility, allowing the company access to the facility. The company also received approval of an amendment to the DIP facility that allows it to provide liquidity to foreign subsidiaries if needed. The financing will allow Chemtura to continue to operate as bankruptcy proceedings continue.

JLM Industries (Tampa) has files for Bankruptcy. The general assignment will likely result in the liquidation of the company’s assets as an alternative to Chapter 7 bankruptcy. The equity fund providing collateral for JLM’s credit line went out of business, resulting in the withdrawal of the credit line and the need to liquidate!!

LyondellBasell’s U.S. operations and a holding company in Germany filed for Chapter 11 protection in the U.S. in January after ongoing negotiations with lenders failed to result in a credit extension agreement. Recently, LyondellBasell has added its European holding company to its U.S. filing for Chapter 11 bankruptcy protection. LyondellBasell Industries AF (Luxembourg) has been added to the filing to protect it against claims by certain financial and U.S. trade creditors. The Company will continue to conduct business worldwide while the company develops its reorganization plan as part of the Chapter 11 process.

These are a few interesting stuff in chemical space and the question is how could you benefit from it?

Continued credit/liquidity issue …. “Light at the end of the tunnel, or a crack in the ceiling?”

2009-05-11T01:08:00.000-04:00

Worst might be over just because of trillions in fiscal and financial stimulus. Reliance on these short-term fixed may not be a sign of economic strength – nor, for that matter, is taking comfort in relatively slower declines. Many takes comfort on the fact that payrolls fell by 539,000, fewer than economists forecast, after a 699,000 loss in March, 2009. Still, the unemployment rate jumped to 8.9 percent, the highest level since 1983 and the unemployment number looks rosier since US government hired 72,000 temporary worker for US Census Bureau.

While last few weeks stock market has surged nearly 40%, there’s still plenty of downside left in this economy. There are some proverbial shoes that have yet to drop and liquidity/credit remains a big concern. Instead of talking about the potential for commercial real estate nosedive, we may want to understand private equity debt, “Level-3” assets, otherwise known as the billions in worthless paper that remain on the balance sheets of banks. What will happen when these Level-3 paper issue hits the fan?

Update on “Dow Chemical Company” - Saving the Titanic and Rewarding Shareholders!

2009-05-10T23:43:00.000-04:00

Shares of Dow Chemical Co. soared in last two month, $6.33/share in March to $17.50/share in early May 2009.

To take advantage of this opportunistic window, Dow has issued $6 billion of debt in a public offering to help pay down some of the funding used in the R&H acquisition. The debt will be offered in three series with different interest rates, coming due in 2014, 2019 and 2039. Dow will use the proceeds to retire the high-dividend stock issued to Paulson & Co. and trusts of the Haas family, as well as to help repay a $9.2 billion bridge loan. Both the high-dividend stock and the bridge loan were used to fund the R&H deal. Paulson & Co. and trusts of the Haas family will offer $1.35 billion of the debt. This is a significant move by Dow as the preferred shares pay an unusually high dividend of about 15%, and paying them off as quickly as possible should save the company cash.

Dow Chemical Company has also announced an offering of $1.63 billion in common stock early part of last week. The offering will increase the company's outstanding shares by about 11%, or 99.5 million shares, sharply diluting the stake of current shareholders.

We all remember Dow’s announcement to slash its dividend to save $1 billion a year.

Dow is also very active in shading businesses, such as selling Morton International salt to Germany's K+S for $1.68 billion in cash, to help pay down debt acquired in the chemical giant's purchase of Rohm & Haas.

Dow has also indicated previously for selling a number of other business interest, such as it may sell its 45% stake in Total Raffinaderi Nederland NV, a Dutch petroleum-refining partnership, or some of its interests in its olefins and derivatives business in Southeast Asia.

Dow Chemical has been aggressive in cutting cost and letting go thousands of employees and many more to go.

The key question remains, will the Dow Chemical stock “DOW” return to it’s height at $ 43.43/share. If so, how soon?

Private Equity: The New Order Now Begins

2009-03-24T04:14:00.000-04:00

An interesting perspective again from WSJ and how the world of private equity has became difficult in absence of debt/lending market... absence of bank financing or leverage, the core PE model is shaken. Then there are the increasing tensions with limited partners – the pensions and endowments that put money into PE and another hot-button issue over how private equity partners should be taxed. While LP /Investors are cautious about the current market environment in making new commitments, but remember the best opportunities come when times are bad and there are plenty of bargain buying opportunities, specially for sector focused buyout firms ... more

Bait and switch – Salt and Fertilizer Producers are busy in merger talk … (K+s/Compass, Agrium/CF, Asahi Kasei/Mitsubishi, Morton Salt)

2009-03-24T02:42:00.000-04:00

Fertilizer company Kali and Salz (K+S) has reportedly delayed making an offer for Compass Minerals International due to Compass’s shares rising on rumors of the possible bid, according to Financial Times Deutschland (Hamburg). K+S would likely have offered about $2.4 billion in cash, or about $78/share, for Compass in a deal that would create the world’s largest salt producer...

Dow Chemical has announced their intention to sell R&H’s Morton Salt unit as well.

Agrium turned up the heat on its $3.6-billion hostile bid to acquire CF Industries after the CF board of directors rejected its offer earlier this month. Agrium says that CF’s refusal to engage in discussions has “left it no choice” but to approach CF stockholders directly. Meanwhile, CF sweetened its $2.1-billion bid for Terra Industries after Terra rejected the offer, and CF has filed materials with the SEC in connection with its proxy fight to install three independent directors to Terra’s board. Terra rejected CF’s most recent bid, saying that being acquired by CF “runs counter to Terra’s strategic objectives, substantially undervalues Terra both absolutely and relative to CF, and would deliver less value to shareholders” than operating Terra as a stand-alone firm.

Asahi Kasei Chemicals (AKC), an Asahi Kasei subsidiary, says it has reached an agreement with Chisso (Tokyo) and Mitsubishi Chemical for the consolidation of the fertilizer businesses operated by their Chisso-Asahi Fertilizer and Mitsubishi Chemical Agri affiliates. The companies have initiated detailed studies for the consolidation but did not disclose the form the consolidation might take.

Interesting activities in an interesting economic time!

Talents are in high demand or ....

2009-03-23T20:54:00.000-04:00

Stocks surged today world-wide after the White House formally unveiled its plan to clean banks' balance sheets, with an emphasis on luring private investors to buy up to $1 trillion in toxic assets that are choking the flow of credit. Even though the initial economic problem was centered on bloated housing inventories that remain unsold, and the gains in new residential construction may prove to be short-lived. Rail shipments of chemicals, considered a key indicator of demand for products such as fertilizer and plastics, dropped by 23.6% last week compared with a year earlier. Car loadings in the U.S. were 36,900 for the week ending March 14, compared with 48,309 a year earlier, and year-to-date rail-car chemical loadings were down 19.3% compared with the same period last year, according to the Association of American Railroads (Reuters). Industrial production and capacity utilization continued to slip in 2009, but the declines were the slowest in the past four months suggesting that we may be starting to approach the bottom of the recession. USA based Chemical production remained steady as strong growth in bulk petrochemicals and organic intermediates and more modest gains in inorganic chemicals and synthetic materials.

Commodity chemicals: Feedstock markets may experience low-cost olefins production in the Middle East, in addition to an increase in refinery capabilities in Asia, the Middle East and the U.S. Steam cracker operators can expect ethylene capacity in the Middle East to more than double; propylene capacity also will increase. Therefore, basic chemical producers (not necessarily specialty chemical) will likely experience very difficult next few years. Overcapacity and weak demand will represent formidable challenges. Closure of unwanted plants is likely to come slowly, due to high exit costs and political barriers. Experts believe that achieving the genuinely low-cost position that will be essential for surviving the next few years.

Specialty Chemicals: While most specialty companies’ top line were far weaker than expected, the margin data which might be a bit tougher to interpret. Many specialty chemical companies may see temporary improvement in gross margins because: 1) raw materials or feedstock chemicals falling faster than pricing and 2) significant cost reduction efforts … primarily layoffs. The question is, will the specialty chemical manufacturer remain “special” after is cycle? The general public perception of chemical industry, "boring" captures the essence of the lackluster image ... the industry is vulnerable to further “talent drain” during this downturn. The reality is that specialty chemical companies need good managers with leadership skills, deep domain knowledge to bring innovation and solutions to our needs. Therefore, good talents continue to be in high demand.

Challenges and opportunities in chemical industry

2009-03-19T21:56:00.000-04:00

The chemical industry is the early stages of a particularly deep downturn that could last for a few years and U.S. exports of commodity chemicals will likely continue to fall as global demand weakens. Sales volumes are declining and profits are plummeting rather rapidly for most chemical manufacturers (worst for basic commodity chemistry sector). So, companies are trying to conserve cash such as Wacker, and Lanxess reduced dividends … more news .

Specialty chemical sector tends to be more resilient; however, the credit crunch has thumped the specialty chemical sector as well. The latest casualty is Chemtura Corporation that has filed for Chapter 11 last night, bankruptcy protection amid declines in orders and cash flow. .. more news (3/18). It would be interesting to see the Q1-’09 earnings for various players.

The picture may appear gloomy, but analysts and industry experts say that, aside from near-term pressures, the crisis may be creating unique opportunities for certain regional players such as producers in Gulf/MENA region. These regional governments are seeking to capitalize on their comparative advantage – abundant and cheap access to hydrocarbons, the building blocks for basic chemistry.

Another silver line is, Fed’s recent announcement that it will begin buying Treasury paper in the secondary market as well as scale up its purchases of Agencies; therefore, it’s expected US dollar to decline in value and a number of specialty chemical company may benefit from it (perhaps trade surplus for chemical sector?)

The situation doesn’t look great right now, but the future could be even brighter for good companies who can execute on their strategic intents. Industry experts believe that company should continue to adjust /re-align their portfolio businesses and retain key talents.

Investor LPs are looking for a new kind of GPs and PE-firms

2009-03-18T01:05:00.000-04:00

Institutional investors/ LPs believe that PE industry will evolve and convinced that the PE asset class will continue to generate attractive returns over the long-term. This is an exciting time to raise funds for entrepreneurs who has good ideas and tenacity for fund raising campaign.

Investors/LPs, many of whom have exposure only to the mega-funds are planning to rebalance their portfolios because of poor performance of large buy-out funds. According to a propriety market research by Almeida Capital, as many as 56% of investors/LPs said they would decrease allocation to large buyout funds in 2009, with just 2% saying they would increase it over the year 2008. It’s more bad news for the mega funds but potentially good news for sector focuses, entrepreneurial private equity managers who invest in special situations, middle markets or in emerging markets, and create TRUE value in their portfolio companies rather than heavy reliance on leverage. The negative sentiment towards larger buy-out funds combined with the fact that substantially fewer funds in total will come to market, as many GPs focus on repairing damaged portfolios, means that fundraising prospects could work in favor of newer funds this year. If GPs target the right investors, who have meaningful allocations for 2009, and can present credible cases for value creation and capital gain, and run effective fund-raising campaigns they will find LPs to be more receptive than before. Almeida claims that a large number of institutional investors and family offices in their LP base are interested in smaller funds, new bloods and in building new relationships with managers who have clearly defined investment strategies that are viable in the current and anticipated mid-term economic environment. Many GPs nearly lost their reputation (and many are in litigations with LPs) who were at the top of the pyramid only a few years ago! The conventional wisdoms (or, entitlement mentality) are in question, since many LPs are working hard to restore their own reputation and working very hard to find innovative and other categories of private equity. LPs have the money and they will invest in good PE firms. Remember, the best investments always happen in a bear market and new kinds of entrepreneurs tend to emerge in tough times!

The biggest jump in LP preference in 2009 vs. 2008 is in secondary investments. 18% of the LPs said they would like to increase allocation to dedicated secondary funds. These funds specialize in taking over investments and commitments of other private equity funds. This type of activities will create opportunities for new comer like ennovance capital as well as existing firms like Coller Capital, Paul Capital Partners and Lexington Partners Inc etc.

The second-largest preference jump 15% in 2009 vs that in 2008 was seen in direct secondary purchases. In such cases, the LP directly takes over the portfolio company/companies of a private equity fund, without involving a secondary’s specialist. Even guys who usually do primaries seem to be interested in secondary’s now! Mezzanine funds showed the biggest increase in interest, after secondary investments, with an additional 9% of LPs regarding the category as attractive.

The Private Equity industry is in point of inflection, LPs are actively seeking new kind of GPs to invest in, the question is “do you have what it takes to seize the opportunity?”

A Shakeout of Private-Equity Firms Is Inevitable

2009-03-16T21:07:00.000-04:00

The private-equity model is here to stay, but the shakeout will significantly change the shape of the industry that will create opportunity for entrepreneurs! I believe that the industry is in at the maturity phase of “product life-cycle” with approaching a point of infection. In fact, Private Equity industry is in the middle of the perfect storm that will create significant opportunity for the emerging entrepreneurs or new type of PE firm who actually know how to build and grow a business (i.e. sector focused executives)!

Private-equity firms have enjoyed extraordinary growth and returns over the last five years, but the collapse of the world’s debt markets and the deepening economic crisis have brought this boom to an abrupt end, with potentially severe consequences for private-equity firms, the companies they own (so-called portfolio companies), and the real economy. Nearly all private-equity firms were able to grow exponentially thanks to an unusually favorable financial and economic climate and, in particular, four major drivers of growth: massive amounts of cheap debt, rising profitability across all industries, escalating asset prices, and the allocation of significant assets from institutional investors to private-equity funds. The recent financial and economic crisis has sent all these drivers racing rapidly in the opposite direction. The debt bubble has burst and a business owner must go back to the basic (i.e. running and building a good business)!

The biggest impact of the perfect storm will be on the private-equity firms themselves and according to BCG around 20 to 40 percent of these firms will disappear; on the other hand, at least 30 percent will survive. The fate of the remaining firms will hang in the balance. The TRUE operation focused PE firms will emerge gain grounds on the next phase of the “life-cycle” because the key players of the firm must understand how to fix and grow a company. Traditional PE firms leaders lack this vital requirements (although, they have been trying hard to fill the gap by hiring “industry operators” that may not be enough!)

Some obvious things are happening such as company earnings have dropped, multiples have collapsed, easy credits are gone, publics are demanding higher accountability from employers, and government /regulatory authorities are scrutinizing more on the issue of “fare play or not—high concentration of wealth at expense of many”! Most private-equity firms’ portfolio companies are expected to default and the overhang of LBO debt on banks’ balance sheets might be as small as $50 billion to $80 billion because banks have already offloaded or written off most of their LBO debts. Some calculate that the potential book loss from the defaults is about $300 billion—on the basis of an estimated LBO debt of around $1 trillion for the entire market and assuming a current value of this debt will remain true (i.e. value will not decline further). This may give another shock in the financial system! Another potentially hidden time bomb is collateralized debt obligation (CDO) and it’s nearly impossible to estimate the level of exposure since CLO debt is not transparent (what a surprise!!). We believe, many PE owned portfolio companies are expected to default on their debt obligations (covenants) within the next 2-4 years that will potentially create opportunity for new comers with entrepreneurial spirit and TRUE operating experience. Fund investors/LP are likely to favor firms that have produced top-quartile, long-term performance, or a new type of PE-firms with first-hand operating experience. Knowledge of shuffling money around may not be enough to create long-term value! Just ask, “What will the owners of the equity and debt do when there are defaults?”

Sleepless nights – deal is done ... Dow acquisition of Rohm and Haas Company

2009-03-13T18:50:00.000-04:00

Story goes that Dow Chemical Co. Chief Executive Officer Andrew Liveris didn’t sleep for two straight nights as he struggled to negotiate new terms for the $16.5 billion acquisition of Rohm & Haas Co. the weekend before a March 9 trial date. Since the announcement many employees of Rohm and Haas Company unable to sleep for a while for fear of job loss. Now the fear of anticipation is gone and reality is about to hit, because company will eliminate an additional 3,500 jobs, mostly at Rohm and Haas. Dow would be aggressive to shed cost and divesture to maintain investment grade ratings and short-term loan obligation. Dow Chemical plans to sell about $4 billion in assets and expects the sale of Rohm and Haas' Morton Salt unit to net at least $1.5 billion. Bloomberg (03/10)

Rock in a Hard Place "DOW/ROH marriage"

2009-03-09T14:22:00.000-04:00

ACC projects that U.S. chemical output, excluding pharmaceuticals, will drop 8.7% this year from 2008 levels. The forecast represents a dramatic decline from initial estimate; in a double whammy of bad news, this year's slowdown in output will come on top of a downward-revised figure for output in 2008 (i.e. 2008 production shrank 6.3% instead of 3.1%) that will probably make Dow chemical more nervous for paying $78/share cash for Rohm and Haas Company transaction. It is unimaginable for Dow to settle out of court if ROH does not make concession. Then again, what are legal grounds for Dow to run away from the deal (except moral ground)??? … Reuters

More merger to come in chemical's select sub-sectors

2009-03-09T00:02:00.000-04:00

Large chemical companies posted earnings declines or even losses in the fourth quarter of 2008; however, fertilizer producers like CF and Terra both reported big gains. Fertilizer is one of the few sub-sectors are doing well and some of them are trying to merge with each other (typical consolidation). For example, Agrium bids $3.6 billion for CF Industries, which had offered to buy Terra Industries for $2.1 billion. It would be interesting to see other consolidation efforts in the industry (e.g. Pharma, petrochemical …. etc.)

Opportunity for bargain hunters to make acquisitions (chemical business)!

2009-03-08T04:16:00.000-04:00

In 2007, we could not have enough of chemical deal news, but current economic condition, lack of visibility in the future, plunge in profits and demand, distressed credit markets are putting frigidity on M&A deals. The deal value in 2008 was down compare to 2007, only $45 billion and Akzo/ICI being $16 Billion. We are seeing many distressed deals, while some companies are forced to consider selling assets to raise needed cash such as Chemtura, or bankruptcy of Merisant. Restructuring will likely bring more assets to market and the gap between seller and buyer expectations has became more interesting/realistic as market conditions have rapidly changed (EBITDA multiples have come down by 2-4X). The slowdown in the economy and in chemical demand is expected to continue, further deteriorating company profits. The challenging economic condition may force companies to focus on the core business and perhaps selling non-core assets. There are a lot of opportunities for private equity players like Ennovance Capital that is “sector focused, operation oriented” (Scratching beneath the surface is a good way to find good opportunities). In current depressed lending markets, Ennovance is very active in sourcing/closing and willing to be flexible with transaction structures and overcome credit shortfalls. On the other hand, most traditional PE firms are on the sideline because of their inability to understand the business operation and inaccessibility of easy credit.

Similar to other historic down cycles (stronger companies are beating the weaker competitions), we expect more consolidations, portfolio adjustments and change of ownerships in chemical industry. Sub-sectors like pharmaceuticals, petrochemicals, agrochemicals (… just a few to name) are expected to consolidate further! M&A strategies for this down cycle are critical to improve scale or cost position, provide technology, or open access to new or emerging markets, or conversion of business model as well as to implement divestitures of businesses that drag on performance. This cycle offers a great opportunity for entrepreneurial and capable operating executives who pose the nerve to invest their own money and fortitude to collaborate with others to access additional/required capitals.
While the total number (and total value) of chemical transactions are expected to be low in 2009, the deal activities are expected to pick up in coming quarters (… fire-sale if economy continue to deteriorate).

I believe, there has not been a better time (at least in the past 10+ yrs) for bargain hunters to make acquisitions! Do we have the will-power to cease the moment?

Private Equity firms performance issue and more changes yet to come

2009-03-08T00:26:00.000-05:00

Private equity firms continue to struggle and I can't believe how quickly things are changing in these markets! U.S. private equity firms are reporting substantial write-downs on their portfolios for the year, but investors are already anticipating the next round of cuts if the equity markets continue to fall. “I’d expect more markdowns” if current conditions hold. Similar to hedge funds, many PE firms will go out of business or PE industry will consolidate. Some of the big name PE firms are reporting:
· Blackstone written down 31 percent for the year and 20 percent for the quarter
· KKR Private Equity Investors, listed in Amsterdam, said this week that its net asset value, had been cut in half by the end of December from a year ago and had dropped 32 percent from the third quarter.
· Carlyle Group wrote down its buyout fund, Carlyle Partners IV, by 13.8 percent
· Terra Firma, whose biggest investment is the music company EMI, reported a 42 percent reduction in the fair value of its investments. .... more at The New York Times

Chemtura - debt and strategic options

2009-03-07T02:48:00.000-05:00

Chemtura is staring at about $375 million of debt that is due in July, 2009 and the management is considering various options to address the issue suchas sale of certain businesses, negotiating an extension with bond holders, finding an infusion of money from an outside investor etc. The company has been working on their strategy and its execution for sometimes with hope of avoiding bankruptcy. Chemtura reported a net loss of $737 million, or $3.04 per share, for the fourth quarter of 2008 and a net loss on a managed basis of $35 million, or $0.14 per share for the quarter. The new CEO, Craig Rogerson has work cut out for him.

stimulus bill and Chemical industry

2009-03-07T02:28:00.000-05:00

Chemical is the very essence of modern life and the industry could reap benefirs from the $787 billion economic-stimulus bill that President Barack Obama signed into law. Chemical products have a very long value chain and at least a tenth of projects in the bill could involve the chemistry industry, including incentives for weatherizing homes, using alternative energy and building new infrastructure projects. ACC estimates that for every $1,000 in nonresidential construction projects, such as roads or bridges, about $160 to $230 makes its way to the chemical industry. MSNBC/The Associated Press

Silverline of a Merger Suit - Dow/Rohm and Haas

2009-03-07T01:50:00.000-05:00

Financial markets and the chemical industry both deteriorated, with neither showing no signs of immediately recovering. The DOW/ROH deal would probably threaten the viability of the merged company, and employee well-being. Dow Chemical and Rohm and Haas are back in discussions about their troubled deal while a trial was scheduled to begin on Monday. Both companies stock performed positively on Friday. CNN MONEY

Two difference view: ExxonMobil Vs. "BASF/Lyondell Mess"

2009-03-07T01:04:00.000-05:00

ExxonMobil to continue chemical investments despite market cyclicality and the current economic downturn, ExxonMobil's chemical unit is projecting an average of 6%/year growth until 2015. I am not surprised because, chemical products will continue to replace paper, aluminium and steel in a variety of applications.

On the other hand, BASF is experiencing a very difficult time, declining revenue and proft, with continued challenging outlook. BASF and many other chemical companies have been shutting down plants or selling businesses. BASF has also been trying to get out of a buyout clause involving BASF's ownership in the Texas chemical plant in partnership with an entity controlled by LyondellBasell Industries. Delaware judge is forcing BASF to stay with the partnership arrangement!.... Bloomberg

The bottom line is that a good company can still grow in a down economic cycle!

PE firms continue to raise fund

2009-03-05T06:59:00.000-05:00

Based on statistics from the LP Source database, 363 U.S.-based private equity funds raised $265.6 billion in 2008, 18% below record $325.8 billion raised by 506 funds in 2007. Economic pains felt across and fund raising is requiring more efforts and longer time. According to Dow Jones, funds of funds and even secondary funds, normally considered well positioned to benefit from market chaos, posted weak fund-raising. There are a lot of good deals in purchase price of a company and profits tend to be much higher when investments are made during down economic cycle. It would be interesting to see next 2 quarters fund raising records and PE firms acquisition activities.

PE can benefit from TALF and potentially help the economy

2009-03-05T06:40:00.000-05:00

Whether or not buyout firms decide to tangle directly with TALF (Term Asset-Backed Securities Loan Facility), this is good opportinity to help the country and make profit. Participating in TALF may indeed improve the current image of Private Equity industry. TALF will provide three-year loans at relatively low interest rates to private investors, who will in turn buy securities backed by newly- or recently-issued consumer debt like car loans, student loans and credit card receivables. The program aims to re-open the securitization market so that banks will start lending to consumers again. A perspective from a well respected jounalist, Shasha Dai:

http://blogs.wsj.com/privateequity/2009/03/04/pes-glass-is-talf-full/

China **Chemical market

2009-03-05T01:42:00.000-05:00

The world’s third largest economy, China will probably need more than yuan (CNY)4,000bn ($585bn) to achieve its “ambitious” target of growing at an 8% pace this year while the rest of the world is in recession. Achieveing 5-6% GDP growth might realistic. Standard and Chartered Bank was quoted in the media as projecting that China may double the current fiscal stimulus package through to 2010. Doing deals in China is interesting and a realistic valuation is difficult. What would be the realist expectation from the seller in current economic environment.

Anyway, for the second consecutive month, the China headline PMI data showed sequential improvement and supports the view that the slowdown in China has bottomed out and the recovery has begun with the help of the government stimulus plan. In looking at the drivers behind the data, it appears a significant improvement in the chemical industry fundamentals was one of the bigger contributors to the overall improvement with improving new orders, a growing backlog, and declining inventories. Based on a deep dive through the data, the strength in China could be viewed as a positive for chemical space.

Win/lose deal - Dow and RandH

2009-03-05T01:16:00.000-05:00

The trial is set to start on 9 March and Its hard to believe that Dow didn’t have much contingencies in the R&H deal. It would be interesting case study for guys like us (deal makers). It's sad to think about employees of both companies if the deal is closed (I need to be neutral regarding this deal since I have many friends in both companies).

Anyway, now all assets of Dow on the table in effort to meet Rohm & Haas acquisition. No assets will be off the table in terms of possible sales as the company struggles to raise cash for its $18.8 billion acquisition of U.S. specialty chemical giant Rohm & Haas. Various reports indicate that Dow was in talks with private-equity firms including Blackstone and Kohlberg Kravis Roberts about selling a minority stake in Dow AgroSciences, and Syngenta was also said to be considering bidding for Dow AgroSciences if it went up for sale. ICIS news

Wacker Chemie

2009-03-05T01:13:00.000-05:00

Investing even in bad economy: Wacker Chemie announces $1 billion plant in Tennessee. German chemical company, Wacker Chemie plans to invest $1 billion in a new plant in Tennessee's Bradley County that is expected to bring at least 500 jobs to the region. The company is one of the world's largest producers of polysilicon, used to make electronics and solar panels, and the county enticed the company to the region by offering a $50 million incentives package. WREG-TV (Memphis, Tenn.)

Lyondell: fund bankruptcy loan

2009-03-05T01:05:00.000-05:00

Check it out: Bankrupt petrochemicals producer Lyondell Chemical Co ACCELC.UL on Tuesday said in court papers that its lenders can fund its $8 billion bankruptcy loan, even if ABN AMRO walks away from the deal. Lyondell is heading to court on Wednesday to ask for approval of its debtor-in-posession (DIP) financing, which would be the largest in history. Investors put in $3.25 billion of new money, and were allowed to boost the seniority of $3.25 billion of existing senior-secured debt by rolling it up into the DIP loan. An additional $1.54 billion of revolving credit is secure by liens on Lyondell's receivables and inventory. ABN AMRO, which says it holds approximately $3.4 billion in outstanding claims against the company has threatened to walk away from the deal, saying in an objection filed on Monday that the roll-up jeopardizes its existing liens on Lyondell's assets. ABN had committed to fund about $326 million of the company's DIP financing, according to court papers. Lyondell said on Tuesday that its other 13 lenders have agreed to fill the funding commitments if ABN walks away from the deal and asked the judge to overrule objections to its loan. ABN had disagreed with how the other 13 lenders decided to document the roll-up loan, Lyondell said, labeling the objection an "intercreditor dispute." ABN AMRO was nationalized by the Dutch government October 2008. Reuters

Bank Debt in the Specialty Chemical Space

2009-03-04T03:20:00.000-05:00

Opportunity or Shellshock for potential investor in current economy? Specialty chemical sector may deserve another look for risk/reward parameters when it comes to leveraged loans. For example: CE, NLC, and ROC.

Should we continue to keep an eye on these asset prices in the event they come under the same amount of pressure seen in the equity markets?

IPIC/Nova deal

2009-03-04T03:05:00.000-05:00

Announcement: IPIC to acquire Nova Chemical-NCX for $6 per share— 02/23/09

Thoughts: Acquisition pricing has never been trickier, such as the price parameters on the Nova deal announced yesterday at 348% premium to market but that represents only 2.6X EBITDA (trailing) and on 0.28X sales. The market values are very depressed in anticipation of an unprecedented business slowdown.

Thoughts on M&A

2008-10-09T22:24:00.000-04:00

M&A work often requires significant input from Finance, from the original evaluation and modelling, due diligence, financing the operation and adjusting internal structures to the new requirements (cashflow, reporting to investors, adapting to corporate needs in post-acquisition integration…).
Not all of this can be met with internal resources or “usual” partners (Banks & M&A firms), the latter particularly in operational considerations, where a “hands on” approach is needed. What are your thoughts on it?

M&A in the chemical industry

2008-10-09T17:02:00.000-04:00

Chemical companies have been performing well in recent years and the opportunities for growth are huge. M&A activity hit a new high in 2007 but remain very careful in 2008. What is your expectation for 2009?