Big money deals dominate materials market

A pair of billion-dollar-plus deals grabbed the materials M&A spotlight in the first half of 2016, even as overall deal volume in that sector declined.

Westlake Chemical Corp. in June ended its lengthy hunt for rival Axiall Corp. when Atlanta-based Axiall agreed to a $3.8 billion offer. That deal will create the second-largest PVC producer in North America, and a major manufacturer of vinyl building products.

Under terms announced June 10, Houston-based Westlake will acquire the outstanding shares of Axiall for $33 per share in an all-cash transaction that has been approved by both boards of directors. Axiall had rebuffed an earlier proposal, which had a total value of $3.1 billion.

Combined, Westlake and Axiall will have annual sales of $7.6 billion and a projected $1.5 billion in earnings before interest, taxes, depreciation and amortization.

Axiall has seven chemical sites and four PVC compounding facilities with more than 20 billion pounds of chemical capacity per year. Westlake is a leading olefins producer and the largest integrated low density polyethylene producer in North America. The acquisition also combines two of the largest PVC building product manufacturers in North America: Westlake's North American Pipe Corp. and Axiall's Royal Group Inc.

“We strongly believe the industrial and strategic logic of this transaction is compelling,” Westlake CEO Albert Chao said in a conference call. “The combined company will be a leader in the North American olefins and vinyls business and together will create a larger, more integrated and diverse company.”

The other billion-dollar deal took place March 21 when W.L. Ross Holdings Corp. bought a majority stake in resin distributor Nexeo Solutions in a deal worth almost $1.7 billion.

Nexeo — based in The Woodlands, Texas — distributes resins, compounds and concentrates for more than 20 suppliers, including ExxonMobil Chemical, LyondellBasell, BASF and DuPont Co. About 40 percent of Nexeo's $3.9 billion in sales come from plastics distribution, with the other 60 percent coming from chemical sales.

In a news release, W.L. Ross CEO Wilbur Ross — a well-known U.S. investor — said that his firm “believes that Nexeo is an ideal platform to further roll up the fragmented chemicals and plastics distribution space.”

Based on sales, industry estimates place Nexeo as North America's second-largest resin distributor, trailing only Ravago Group (including Muehlstein) and ahead of PolyOne Corp. and M. Holland Co.

The purchase price represents a multiple of 8.4 times Nexeo's estimated adjusted EBITDA for calendar year 2016. The firm employs almost 2,500 worldwide, including 500 sales reps. Nexeo distributes material from 170 locations worldwide and operates a private fleet of more than 1,000 vehicles.

Both of those deals occurred against a backdrop that saw the number of global resin, color and compounding deals fall from 30 in the first half of 2015 to 21 during the same period this year — a drop of 30 percent. Those totals were compiled by P&M Corporate Finance of Southfield, Mich.

“There are fewer compounders and concentrate makers available to buy now,” said Bill Ridenour, president of Polymer Transactions Inc. in Foxfire, N.C. “PolyOne, Schulman and Citadel have bought so many of those mid-market firms in these last few years.”

The Nexeo-Ross deal also drew the notice of financial pros, particularly with Ross taking Nexeo public on June 10.

“Distribution always has been interesting to private equity,” said Andrew Petryk, managing director at Brown Gibbons Lang in Cleveland. “Those businesses often have good EBITDA growth and they aren't capital intensive.”

Distribution “is a good space for consolidation,” according to Ben Whiting, plastics team director with KeyBanc Capital markets in Cleveland. “There's a lot of interest [in distribution] in the financial buyer community. Those companies are asset-light and the market is very fragmented.”

Distribution firm Maroon Group LLC of Avon, Ohio, also has been active, making four deals since mid-2014, when private equity firm CI Capital Partners of New York bought a majority stake in the business. Most recently, Maroon in May bought U.S. Chemicals LLC of Darien, Conn.

Maroon's product mix includes pigments and additives sold to plastic compounders and concentrate makers. Whiting said that Maroon “has real expertise in the distribution space.”

Mesirow Financial managing director Rick Weil said that in comparing distributors to plastics processors, distributors could be more attractive to investors because of their lower capital expenses. “They don't have to buy new processing equipment and upgrade all the time,” he said. “And they're product-agnostic — they just want to find an answer for their customers.”

More deals for PolyOne

PolyOne — the Avon Lake, Ohio-based firm that ranks as North America's largest compounder and concentrates maker — kept its acquisition streak alive in the first half of 2016. The firm paid $72 million to Kraton Performance Polymers Inc. of Houston for “certain technologies and assets.”

PolyOne officials said in a news release that the assets were thermoplastic elastomer-related. Kraton's TPE products are based on styrenic block copolymers.

PolyOne officials added that the deal will allow it to further expand its TPE business, which includes its GLS product line. PolyOne and Kraton also have entered into a supply agreement under which Kraton will supply certain raw materials used by the acquired business.

End markets served by the acquired products include adhesive and removable protective films, as well as packaging, medical devices and personal care products.