The North American plastic materials market still is sorting out TPG Capital LP's $930 million bid to acquire Ashland Distribution, one of North America's largest distributors of resins and chemicals.
Ashland Distribution generates about 40 percent of its $3.4 billion annual sales total from plastics. Its resin suppliers include Sabic Innovative Plastics, LyondellBasell Industries AF SCA, BASF Corp., ExxonMobil Chemical Co. and Borealis AG. The unit operates from 132 warehouses in North America and 14 in Europe, and also operates its own private fleet of trucks, tankers and trailers that includes a total of almost 1,000 vehicles.
The purchase price represents a multiple of about 10.4 times annual earnings for Dublin, Ohio-based Ashland Distribution, which has been a unit of Ashland Inc. of Covington, Ky. Pre-sale estimates from within the industry speculated that the top price for the unit would have been $800 million, for a multiple of just under nine.
For San Francisco-based TPG, it's the second time the firm has made a big move into distribution this year. TPG earlier paid $1.3 billion to acquire American Tire Distributors Holdings Inc., the region's largest independent tire distributor. Tire distribution apparently is popular with financial firms, since TPG's purchase marked the third time ATD has been bought by a financial group in the last five years.
But in plastics, the Ashland investment has surprised some market watchers. Resin distribution businesses typically have thin profit margins and don't own many assets or produce their own products. As a result, it might be difficult for an investor such as TPG to increase the unit's value in a short period of time and sell it at a profit, as many private equity firms tend to do.
Distributors typically aren't worth as much as manufacturing companies because they don't have the grip on their customers that manufacturing companies do, said Bill Ridenour, president of Polymer Transaction Advisors Inc. in Newbury, Ohio.
Distribution firms have higher risk and don't offer as much reward, he added.
When the deal was announced in early November, TPG officials said the firm 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, TPG partner Kevin Burns said in a news release.
TPG officials declined to comment further before the deal's March 31 closing date. After the initial announcement, a TPG spokesman did confirm that the firm plans to keep Ashland Distribution's headquarters in Dublin.
Ridenour as well as investment pros Thomas Blaige and John Hart said that the multiple TPG is paying for Ashland distribution seems a bit high. But Blaige and Hart each pointed out that the high multiple might be a function of using data from 2009, which was a down year throughout most of the economy. Ashland Distribution's sales fell almost $1 billion between 2008 and 2009, finishing 2009 at $3.4 billion.
The [TPG-Ashland] multiple was based on trough numbers, said Blaige, president of Blaige & Co. in Chicago. Ashland's earnings were lower than what they'd be in a typical year. The business has been performing at recessionary levels, and TPG must believe it will perform better in a normalized year.
The multiple might not have been above 10 if the business was at normal earning levels, said Hart, plastics and packaging director at P&M Corporate Finance LLC in Southfield, Mich. There's some recovery built in to the price.
Hart added that Ashland Distribution had a number of attractions for TPG, which ranks as one of the world's largest private equity firms, with more than $50 billion in assets. TPG initiated a public offering for specialty polymer maker Kraton Polymers last year and remains the largest shareholder in that firm.
TPG likes the chemical sector, and Ashland Distribution has a strong management team and is a global player, Hart said. And since the deal's being done as a corporate carve-out, it's got opportunities to improve. It wasn't an optimized business [within Ashland].
TPG will find room for improvement at Ashland Distribution. In addition to the sales drop, the unit's sales volume fell 23 percent between fiscal 2008 and 2009. Its pretax profit peaked at $141 million in fiscal 2006, but hasn't been above $84 million since then.
Most likely, TPG will try to find ways to improve Ashland's operating costs and create a more favorable cost structure, Blaige said. Hart added that TPG could expand Ashland's distribution product portfolio and enter new markets, as well as potentially grow either organically or by acquiring competing distributors.
Having access to such a large distribution network also might help TPG's position in making future plastics and chemicals acquisitions, according to Ridenour, by providing a major sales channel for products made by acquisition targets.
Overall, all three financial veterans said the TPG-Ashland deal might signal an upswing for M&A activity in plastics and chemicals. Hart described it as a marquee deal in our sector.
And any concerns about the value of the deal should be lessened by TPG's track record, Blaige said.
TPG can point at past deals and say 'We can find a way to make this work,' he said.