The plastic materials corner of the mergers and acquisitions world slowed down a bit in 2006, but the market might just have been catching its breath for 2007.
That became evident Jan. 10, when the Wall Street Journal reported that General Electric Co. was seeking a buyer for its GE Plastics unit, one of the plastics market's most historic properties. The Journal reported the asking price for GE Plastics could be as high as $10 billion, although GE Plastics officials declined to comment on the report.
Major private equity firms are expected to be the top bidders for GE Plastics, a maker of engineering resins and specialty film and sheet that employs 11,000 worldwide and has annual sales of almost $7 billion. Within the plastics market, industry watchers have said that competitors like Dow Chemical Co., BASF AG and Bayer AG may be interested in certain parts of GE Plastics, but not the entire unit.
If GE succeeds in getting $10 billion for the plastics business, that effectively could set the bar for prices of future similar plastics and chemicals transactions, insiders said.
The biggest materials-related M&A deal in 2006 was Georgia Gulf Corp.'s $1.6 billion deal for PVC building product giant Royal Group Technologies Ltd. But market watchers said that transaction may prove to be a one-of-a-kind situation unique to the PVC market.
Essentially, what Atlanta-based Georgia Gulf did was imitate a downstream business model emulated by such competitors as Formosa Plastics Corp. USA and Westlake Chemical Corp., both of which are PVC makers that own their own pipe businesses. Georgia Gulf ranks as North America's third-largest PVC maker, based on estimated annual sales.
``A lot of big companies would still shy away from that kind of deal,'' industry analyst Balaji Singh said of the Georgia Gulf/Royal sale. Singh is president of Chemical Market Resources Inc., a consulting firm based in Houston.
The other sizable resin-related deals were Huntsman Corp.'s $700 million sale of its European plastics and base chemical business - including polyethylene - to Saudi Basic Industries Corp. (Sabic) and Westlake's acquisition of the PE business of Eastman Chemical Co. for $255 million.
Both were cases of longtime chemical players exiting businesses in which they had become smaller presences. Sabic - based in Riyadh, Saudi Arabia - was looking to leverage its low-cost feedstock position. The firm had made a similar deal with DSM NV in 2002. Westlake strengthened a profitable position in a niche market through its deal with Eastman.
Looking ahead, Singh said that there are ``certain properties'' in the petrochemical field that still look attractive to investors or competitors, but that others have proven to be overpriced after being acquired.
In a Jan. 2 report, stock analyst Kevin McCarthy - with Banc of America Securities LLC in New York - pointed out that commodity petrochemical makers lagged financially in 2006. Companies in that category occupied seven of the bottom 10 spots in BOA's 30-stock index of the chemical industry.
Georgia Gulf and Nova Chemicals Corp. suffered the largest stock-price declines in 2006, with Georgia Gulf affected by lower PVC volumes and Nova hurt by margin erosion in PE and ethylene feedstock, McCarthy said.
As a result of that financial picture, strategic buyers from within the industry might be more active than financial buyers in 2007, according to Singh.
``Financial buyers might look to other investment opportunities [in 2007], especially if they're disenchanted with the results they've seen in petrochemicals,'' he said.
Some rumored deals could heat up the market. One of them is the possible sale of styrenic block copolymer maker Kraton Polymers LLC by Texas Pacific Group, the Fort Worth, Texas-based investment firm that bought Kraton for $770 million in 2003. Texas Pacific paid $250 million more for Kraton than Ripplewood Holdings LLC did when it bought the business from Royal Dutch/Shell Group in 2001.
Now, Texas Pacific might be looking to unload Kraton, even though the business is still very profitable, according to market insiders.
A recent rumor that Dow would move downstream into PVC production by acquiring Georgia Gulf also has been making the rounds, as has conjecture about Sabic buying Huntsman's plastics and chemicals business based in Odessa, Texas. Singh said that although the first two rumored deals are possibilities, he'll be surprised if the latter two come to pass.
Buying Georgia Gulf ``would be contrary to everything that Dow has been doing'' for the past several years, he said. ``And I don't see what Sabic would gain from buying the Huntsman business'' in the U.S.
Some smaller deals took place in the compounding field in 2006, including the Audax Group investment firm buying a stake in liquid color maker ColorMatrix Corp. of Berea, Ohio, for $175 million. RTP Co. of Winona, Minn., also made a downstream move by acquiring custom film maker Wiman Corp. of Sauk Rapids, Minn.
Ravago SA of Arendonk, Belgium, also rocked the resin distribution market in 2006 by purchasing a controlling interest in North American market leader Muehlstein Holding Corp. of Norwalk, Conn.
Looking ahead, Singh said he foresees that in another 10 years, manufacturing and technology investments now being made in China and India will result in growth for North America, as other global economies mature and develop.
``It's all part of a cycle that will result in investment in new business in the U.S.,'' he said.
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Top materials M&A deals of 2006
1. Buyer: Georgia Gulf Corp.
Seller: Royal Group Technologies Ltd.
Amount: $1.6 billion
The deal: PVC maker moves downstream into finished products.
2. Buyer: Saudi Basic Industries Corp.
Seller: Huntsman Corp.
Amount: $700 million
The deal: Sabic leverages feedstock position with purchase of European plastics and base chemicals unit.
3. Buyer: Westlake Chemical Corp.
Seller: Eastman Chemical Co.
Amount: $255 million
The deal: In polyethylene deal, Westlake gets bigger, while Eastman exits the market.
4. Buyer: Audax Group
Seller: ColorMatrix Corp.
Amount: $175 million
The deal: Private equity firm makes big bet on liquid color maker, buying a stake in the firm.
Source: Plastics News