Timing is important not only in comedy — it's also a pretty big deal in mergers and acquisitions.
For example, if you tried to close a materials-related plastics M&A deal in the first half of 2008, you were in pretty good shape. If you waited until the second half of the year … well, the story probably didn't have a happy ending.
This condition of caution is likely to continue on into 2008, at least for private equity investors, according to market veterans Thomas Blaige and Bill Bowie.
Plastics News tracked five compounding-related deals in the first half of 2008, but only three in the second half of the year. On the resin side, there were no first-half deals and only one completed in the second half — Lubrizol Corp.'s purchase of the thermoplastic polyurethane business of Dow Chemical Co.
Two resin M&A deals imploded in spectacular fashion in the second half. Hexion Specialty Chemicals Inc.'s planned merger with Huntsman Corp. fell apart when Hexion investor Apollo Management LP — a giant in the world of private equity — balked at the purchase price. Dow's planned joint venture with Petrochemical Industries Co. of Kuwait suffered a similar fate for similar reasons.
Huntsman will receive a $1 billion breakup fee from Hexion, while Dow is trying to collect a breakup fee of at least $2.5 billion from PIC. Reliance Industries Ltd. of India also walked away from its planned purchase of a former polyester yarn plant in North Carolina that was to be converted into a resin production site.
All of this occurred against a backdrop of a global economic recession that caused resin demand to shrivel and prices for oil and gas feedstocks, as well as resin itself, to swoon rapidly.
``There's going to be a change in the type of deals that are being made,'' said Blaige, chief executive officer and managing partner of the Blaige & Co. investment banking firm in Chicago. ``The availability of credit has been reduced and has become tighter. We're going to see fewer financial deals as well.
``Large [materials] companies will look at divestment opportunities and ones that perform well, like niche players, will still have M&A opportunities.''
Bowie, chief operating officer of the Resin Technology Inc. consulting firm in Fort Worth, Texas, added: ``Everybody's pulling back on credit and everyone's nervous. I can't imagine people getting excited when they see what resin is selling at.
``I think a lot of people are concerned about current low [resin] prices and overall volatility. How do you assess the value of resin inventory when you're trying to make a deal?''
Citadel Plastic Holdings Inc. was one of the few firms able to wheel and deal throughout 2008 — and may continue to do so in 2009. The Chicago-based firm — majority-owned by private equity investor Wind Point Partners LLC of Chicago — closed three M&A deals in 2008, buying Bulk Molding Compounds Inc. and Aclo Compounders Inc. and selling two European compounding plants to So.f.ter. SpA of Forli, Italy.
The European plants had been owned by Matrixx Group, a compounder that Citadel acquired in 2007.
Blaige said that he believes a company like Citadel will be able to continue its M&A activity in 2009 because it enters the year with existing hard assets in the plastics field. A private equity firm entering the market for the first time in 2009 might not be able to do so. Citadel probably would have had the same problem if it had waited a year to launch its strategy, Blaige said.
``Citadel has a profitable strategy, because it's a blend of financial and strategic investment,'' he said. ``But pure private equity funds will have trouble if they have no assets. Platform financing will be difficult. Add-on acquisitions should be OK.''
The failure of the big resin deals ``scares private equity away from market,'' RTI's Bowie said, but shouldn't have much of an impact on resin processors or compounders.
``The days of being concerned about whose name is on the [resin] box are over,'' he said. ``That doesn't affect [processors] anymore.''
Overall, Blaige expects the number of global materials plastics M&As to decrease from 70 in 2008 to between 65 and 70 in 2009. If that happens, it will be the first time since at least 2000 that the number of such deals declined in back-to-back years, according to research conducted by his firm. The number of materials deals had been 85 in 2007.
``The number [of materials deals] will be slightly down because of the economy,'' Blaige said. ``But the No. 1 trend is still globalization and international expansion.
``People want to create bigger, stronger companies.''
In 2009, Blaige added that he expects commodity materials companies to sell for multiples of 5 times pretax earnings, while specialty materials firms should command selling at prices of 8-10 times pretax earnings.
And even with the economy seemingly in dire straits, both Bowie and Blaige said they do not expect to see a high number of materials assets dumped on the M&A market in 2009. That's partly because buyers will be more discerning and sellers might not get enough value out of such moves.
``There will always be fire sales available, but those are weaker or overleveraged assets,'' Blaige said. ``And buyers aren't buying now if the properties don't fit. They're not buying shoes or purses, they're buying companies. CEOs can't make deals just to make deals anymore.''
``I think in some cases, the entrepreneurs that built some of these firms might not even try to sell [in 2009] unless it's a matter of survival,'' Bowie said.