Ashland Inc. announced Nov. 8 that it has signed a definitive agreement to sell its global distribution business to investment firm TPG Capital for $930 million.
Ashland Distribution has been a part of Ashland Inc. for more than 40 years. The unit employs 2,000 and has annual sales of about $3.4 billion. The company distributes chemical products in North America, Europe and China.
“We are very excited to invest in Ashland Distribution, which Ashland has built into one of the leading global chemical distribution companies,” said Michael MacDougall, partner at TPG Capital, in a news release.
Kevin Burns, partner at TPG Capital, added: “TPG has a long history of helping former subsidiaries thrive as independent companies. With our experience in chemicals and distribution, and the management team's deep knowledge of the sector, the potential is high for continued strong performance at Ashland Distribution.”
The deal is scheduled to close prior to March 31. TPG is expected to keep the unit's headquarters in Dublin, Ohio, where it has signed a multi-year lease, according to a source close to the deal. The source added that TPG plans to keep current Ashland Distribution management in place and will invest to grow the business.
A TPG spokesperson declined to comment beyond the news release.
In a Nov. 8 phone interview, Ashland Chairman and CEO James O'Brien said Ashland Distribution's customers will see “no disruption” as a result of the sale.
“TPG is a very substantial private equity group that's wanted to get into the plastics and chemicals distribution space for some time,” he said. “They really liked our position in the market. They believe there's a lot of scale to be created here.”
Ashland talked to “many interested parties” before deciding to sell the distribution unit to TPG, according to O'Brien. He declined to provide specifics, but said the group of potential buyers included both financial firms and companies from within the plastics and chemicals industry.
O'Brien also declined to say whether that group included Saudi Basic Industries Corp., the Saudi Arabian petrochemicals maker that was believed to be a frontrunner for the business.
O'Brien did say, however, that Ashland “had no intention of splitting the [distribution] business” into plastics and chemicals when seeking a buyer. Some market watchers had speculated that finding a buyer for the whole unit would prove difficult.
“One of the things that attracted [TPG] was that it was a single business,” O'Brien said. “Busting it up would have destroyed value, not created it.”
The unit's resin suppliers include Sabic Innovative Plastics, LyondellBasell Industries, BASF Corp., ExxonMobil Chemical and Borealis. It operates from 132 warehouses in North America and 14 in Europe. The unit also operates its own private fleet of trucks, tankers and trailers that includes a total of almost 1,000 vehicles.
When Ashland confirmed in August that it was seeking a buyer for the distribution unit, Sabic was rumored to be the front-runner for the acquisition. Sabic officials declined to comment on its rumored interest, but the firm issued a statement saying that Sabic “has had a strong working relationship with Ashland over the last two years.”
“[Ashland] has delivered on their commitments to our business and continue to work to enhance their service levels for our customers,” Sabic officials said in the statement. “At this time we have no reason to believe that TPG Capital's purchase of Ashland's distribution business will alter our relationship in any way. We believe it will remain business as usual.”
A number of market watchers said that the purchase price that TPG paid for Ashland Distribution seemed a bit high. When discussing Sabic and other rumored buyers, no valuation higher than $800 million was mentioned, sources said. The sale price represents a multiple of 10.4 times the unit's fiscal 2010 pretax profit of $89 million.
Fort Worth, Texas-based TPG has previous experience in the plastics and chemicals market as co-owner of Kraton Polymers LLC, the leading styrenic block copolymer maker based in Houston.
The impact of TPG's purchase of Ashland Distribution on the overall North American resin distribution market “is all dependent on TPG's goals,” said Ed Holland, owner of resin distributor M. Holland Inc. of Northbrook, Ill. M. Holland ranks as North America's fourth-largest resin distributor, according to industry estimates.
“Do they want to spin it off, break it up or make money quickly?” Ed Holland asked. “Or do they want to invest in long-term strategy? [Long-term investment] doesn't seem like the way private equity companies usually go, but it's too soon to tell.”
David Der Hagopian, president of resin distributor and compounder Entec Polymers in Maitland, Fla., noted that the deal was the first time that a major distribution firm has been sold to a financial company.
“It seems like our suppliers get sold all the time now, so I guess it makes sense that a distributor would follow,” he said.
Based on sales, Ashland's distribution business ranked as the largest of the firm's five operating units in its 2010 fiscal year, which ended Sept. 30. Distribution generated sales of $3.4 billion for the fiscal year, representing about 37 percent of total sales and showing an increase of about 13 percent vs. fiscal 2009.
But in operating income, distribution placed only fourth among Ashland's five units for the year. Its $55 million operating income figure was up about 6 percent from the year-ago period and represented less than 10 percent of Ashland's total operating income.
For the 12-month period ended March 31, Ashland had distribution sales of $3.1 billion and volume of 3.7 billion pounds, according to data presented in June by Ashland Distribution President Bob Craycraft at an analyst event in New York. During that 12-month period, 41 percent of Ashland's distribution sales came from plastics.