From resin blockbusters to specialty compounders, plastics materials firms could provide attractive merger and acquisition targets for private equity firms in 2005.
``Private equity companies are looking for deals in plastics and chemicals,'' said Jeff Dancer, president of Allan F. Dow Group LLC, a Houston-based M&A consulting firm.
``Last year, they were looking at companies in the $300 million [sales] range. Now they're looking at companies around $100 million, and sometimes even $20 million to $25 million, if they're good companies.
``There's a lot of pressure for [private equity firms] to find deals to invest their money.''
Since early 2004, Plastics News has tracked seven M&A moves in the North American compounding market.
Only one of those deals involved a private equity firm - Metapoint Partners LP of Peabody, Mass., which bought Manchester, N.H.-based Nylon Corp. of America.
Of the other six, three were bought by other compounders, two came from bankruptcy proceedings and one came via a management buyout.
But that could be changing, according to Dancer, who has been active in the M&A field since wrapping up a 25-year career with Phillips Petroleum Co. in 1999. Private equity firms also could be set to nab properties such as polypropylene market leader Basell Polyolefins of Elkton, Md. Sizable money should flow into initial public offerings for plastics and chemicals makers Huntsman Corp. of Salt Lake City and Celanese AG of Frankfurt, Germany, as well.
A host of U.S. private equity firms - including Apollo Management LP, Blackstone Group LP, Citigroup Inc., J.P. Morgan Chase & Co., Bain Capital LLC and Goldman Sachs Capital - along with Germany's UBS AG and Deutsche Bank AG have been mentioned in connection with Basell.
The upcoming Huntsman IPO, set to raise $1.6 billion, represents a unique opportunity for investors ``to put their money in a business with a good reputation and that's well-diversified,'' Dancer said.
Other materials properties that potentially are in play are Lanxess AG, the Bayer AG spinoff that includes ABS resin; Arkema Inc., the Total SA spinoff that includes Plexiglas acrylic sheet; and the olefins and derivatives business of British Petroleum plc, which includes a major PP business.
In the 2005 market, materials firms can expect to command multiples of three to six times earnings before interest, taxes depreciation and amortization, according to Dancer, but a firm hoping to attract private equity dollars has to have its house in order.
``Private equity buyers are looking for companies with a very solid advantage in the marketplace, whether it's in scale or technology or something else,'' Dancer said.
``You also have to have a good management team in place.''
Combining several smaller firms to create a larger one is not attractive to the private equity field, he added, because of the time and effort involved.
``It takes these [private equity] firms just as much time to do a $2 million deal as it does a $200 million deal,'' Dancer explained.
Private equity also is not scared off by fluctuations in resin pricing - since they see that as part of doing business in a cyclical industry - but the cold fact of the matter is that such firms already have an exit strategy in place when they make a purchase.
Equity firms ``want to increase the value [of an acquired firm] in a short period of time,'' Dancer added. ``They're going to have their management asking them, `Isn't it time to flip that thing?' ''
And that kind of strategy ultimately may have a negative effect on research and development and the creation of new plastic materials, he warned.
``I'm worried about the industry a little bit,'' Dancer said.
``The industry itself has always felt it necessary to come up with product development and R&D. But when the main strategic objective is financial only, that's going to place some pressure on new technology.''