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February 18, 2008 01:00 AM

Resin-related M&&As attract private equity

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    What could you get for $50 billion in the 2007 plastics mergers and acquisitions market? How about three (and a half) major material producers?

    Actually, the tab for purchasing GE Plastics, Huntsman Corp., Lyondell Chemical Co. and half of Dow Chemicals' polyethylene, polypropylene and polycarbonate units came to $50.9 billion - but what's a half billion really matter to private equity firms and state-backed Middle Eastern companies?

    Going down the year's roll call, we find:

    * Saudi Basic Industries Corp. of Riyadh, Saudi Arabia, paying $11.6 billion for engineering plastics power GE Plastics.

    * Hexion Specialty Chemicals Inc. - backed by private equity giant Apollo Management LP - snagging polyurethane leader Huntsman for $10.4 billion. This deal is still awaiting approval from the Federal Trade Commission, which has requested additional information from both companies. A Huntsman spokesman said there's no financial reason for the delay.

    * Basell Holding BV - owned by Access Industries Inc., another private equity player - picking up Lyondell for $19.4 billion.

    * Petrochemical Industries Co. of Safat, Kuwait, taking on half of the Dow businesses for $9.5 billion.

    ``If you look at the megatrend outside of plastics, plastics then looks like a microcosm of the new capital holders,'' said Nick Chini, managing principal with Bainbridge Inc., a management consulting and M&A advisory firm in San Diego. ``There's a lot of private equity looking for good quality deal flow.''

    ``The [U.S.] dollar being low will draw more international buyers than ever,'' he added. ``Interest from other parts of the world will be higher because they'll be able to get more for their dollar. There are petrodollars in Abu Dhabi and Asian trading dollars in Singapore.

    ``The plastic market is global right now. If you believe in growth in India and China, you're going to be bullish on plastics even if it's a commodity. That's consistent with other commodity sectors. You can do the same comparison on energy, metals and other raw materials. This bull run will continue until a substitute for these commodities comes along.

    ``Even if the U.S. hits a recession - which I think we're already in - there's still going to be demand for plastics.''

    And the presence of private equity companies in the market is something plastics firms should become accustomed to, according to Stewart Kohl, managing general partner of private equity firm Riverside Co. in Cleveland.

    Globally, private equity investment peaked in the second quarter of 2007 when it represented 25-30 percent of all M&A deals, according to Kohl. Historically, this number had been below 10 percent.

    As credit markets have tightened, this percentage has dropped somewhat, but Kohl said ``it's not going back to 10.''

    ``M&A reflects a significant return for private equity - it can be very attractive,'' he added. ``As a result, private equity firms have become aggressive strategic buyers.''

    The value of plastics firms to the M&A market is apparent in Riverside's 32-company portfolio. The portfolio includes Hudson-Sharp Machine Co., a maker of plastic bag-making machines in Green Bay, Wis., and three firms involved in plastics processing - Commonwealth Laminating & Coating Inc. of Martinsville, Va.; Connor Sport Court International of Salt Lake City; and Stoffel Seals of Nyack, N.Y.

    Kohl agreed with Chini, saying that non-U.S. buyers ``are looking at U.S. companies as cheap today. These are [state-owned] sovereign wealth funds with money to spend.''

    As of Jan. 29, the U.S. dollar was worth less than 70 cents when compared to the Euro used by many European countries. The two currencies haven't been of equal value since late 2002.

    The compounding market also was active in 2007, with at least six deals involving U.S. firms taking place, including:

    * Compounding leader PolyOne Corp. buying thermoplastic elastomer compounder GLS Corp.

    * Basell buying PP compounder Solvay Engineered Polymers.

    * Private equity firm Wind Point partners acquiring color and additive compounder Matrixx Group.

    * A. Schulman Inc. picking up Swedish color concentrate maker Delta Plast Group.

    * Liquid color maker ColorMatrix Group snagging Swiss color concentrates maker Colorant-Chromatics Group.

    * Private equity firm Spell Capital Partners adding PVC compounder Prime PVC Inc.

    No purchase price was disclosed in any of the above deals. Market sources estimated the Solvay EP transaction at between $100 million and $150 million.

    It's difficult to estimate the purchase multiples - the number multiplied by a firm's earnings to calculate its sale price - for the compounding deals, but the four major material deals each had multiples estimated at 10 or higher. That's a fairly high number given recent M&A history.

    ``It's all supply and demand - and [10] is the multiple that the market is willing to bear now,'' said Chini. ``A multiple of 10 is average in this market. And remember that foreign buyers are getting a 20-25 percent discount because of the currency difference. Middle Eastern firms are holding dollars from oil trading. They've got more capital than they can place.''

    ``As [M&A] activity peaked in the second quarter, larger deals tended to trade at higher multiples,'' added Kohl at Riverside. ``Now, we'd expect to see multiples backing off because of the credit situation.''

    The changing materials landscape created by all of this M&A upheaval will have an effect on North American processors and their resin buying efforts, according to Bill Bowie, chief operating officer of Resin Technologies Inc., a resin-buying consultancy in Fort Worth, Texas.

    ``The North American polyethylene market had 18 suppliers in 1999, and now there's 10,'' Bowie said. ``A processor used to always be able to find someone hungry that month who would move a car [of resin] at a lower price. You could find someone to do a deal if you were a savvy buyer.''

    ``Now, these big companies like Dow, ExxonMobil, Nova and ChevronPhillips don't have to be followers. It's an ongoing issue to deal with and North American processors aren't alone. Now, [resin makers] believe size is the way to survive and larger customers are driving partnerships.''

    Bowie described the Dow-Kuwait deal as ``a watershed moment'' for the North American resin market.

    ``It was more of a surprise,'' he said of the deal. ``You knew the GE Plastics business had been out there [for sale] for some time and you knew it was coming. But Dow - maybe because they're based in the Midwest - just seemed a bit more surprising.''

    Chini and Kohl also did their best to disprove some of the myths that may have accumulated around private equity ownership. When private equity is mentioned - regardless of the industry - some expect drastic cost-cutting and a quick turnaround and sale. Chini and Kohl each said that's not always the case.

    ``Any private equity firm worth its weight will run a business effectively,'' Chini said. ``If a buyer doesn't see potential development, that could reduce their interest.''

    ``If it's more of a turnaround situation, you might see people being fired and the business broken up,'' Kohl added. ``But it's been my experience that when you pay high multiples, you can't cut back on marketing, [research and development] and employment if you want to get anything out of the company.''

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