Private equity firms want to continue making inroads into the plastics and chemicals market, according to an industry veteran now working in the financial field.
``Right now, private equity firms are studying your numbers and sorting out targets,'' Jeffrey Dancer said at Flexpo 2004, an industry conference held Sept. 15-17 in Galveston. ``If your numbers look good and you have a good track record, they may give you a call.''
Dancer is president of Allan F. Dow Group LLC, a Houston-based consulting firm focused on mergers and acquisitions. He joined the company after concluding a 25-year career with Phillips Petroleum Co. in 1999.
Although plastics and chemical firms underperformed the Standard & Poor's stock index by more than 70 percent in the red-hot 1990s, things have turned around recently. Between 2000 and 2004, plastics and chemicals stocks are up 24 percent, while the S&P is down 14 percent, Dancer said.
The best proof of that interest comes from Kraton Polymers, the Houston-based specialty polymers maker that was bought by the Ripplewood Holdings LLC equity firm in 2001, then sold to Texas Pacific Group, another equity firm, for a $250 million profit late last year.
Equity company AEA Investors Inc. also recently sold specialty plastics and chemicals maker Noveon Inc. of Brecksville, Ohio, to Lubrizol Corp., a specialty chemicals firm, for $1.8 billion. Additionally, the Blackstone Group equity firm has made sizable investments in plastics and chemicals maker Celanese AG and packaging firm Graham Container Co. LP.
``Some downstream investments have done well [for private equity firms]'' he explained. ``But Wall Street still looks at our industry with a degree of skepticism, since an upward movement in energy prices can cause margin compression, and because the long-term global competitiveness of U.S. producers is in question.''
In spite of Wall Street's reluctance, private equity firms are combing the ranks of plastics and chemical firms to find companies they can operate efficiently for a few years before selling for a profit.
Private equity firms ``love businesses like Kraton, ones that have a competitive advantage in the market and that they can flip in a few years,'' Dancer said.
However, private equity interest can have potential drawbacks, such as employee turmoil caused by ownership changes and the reluctance of a private owner to invest in new products and new technology, Dancer added.
The other option open to companies such as British Petroleum plc and Basell Polyolefins - both of which have considerable polypropylene and related assets on the market - is an initial public offering. But Dancer said the benefit of being a publicly held plastic and chemical company ``isn't what it used to be.''
``Financial markets don't value our industry very well,'' he said. ``They don't like surprises, and we still don't have the best public image in the world. Our customers love our products, but the public still isn't convinced we're good corporate citizens.''
All of which could make it more likely for private equity firms to enter the market - as long as they can find firms with annual returns of 20 percent or more, that is.
``There's a lot of cash out there looking for a home,'' Dancer said. ``The main problem is they can't find enough deals to do.''