Catalyst

So much for the dog days of summer. This is turning out to be an extraordinary season for the industry. Three deals have eclipsed the $10-billion mark so far, and there have been a scattering of billion-dollar transactions. Sabic, Apollo Management (New York), and Access Industries (New York)—industry’s emerging heavy hitters—have recently agreed to acquire GE Plastics, Huntsman, and Lyondell, respectively, in separate deals valued at more than $10 billion each. Akzo Nobel soon could join that once-exclusive club, if it decides to press ahead with a formal bid for ICI.
Could Sabic, Apollo, Access and perhaps others have designs on creating a chemical industry Champions League this summer, with plans to keep acquiring available industry assets until no one is left on the sidelines? More seriously, one wonders what will bring an end to this activity. Will activity moderate, or will there be some industry or macro mega-event—along the lines of a default that further spooks the bond markets, or something like the late-1990s Asian currency crisis—that shuts down activity.

Three officials of Abiquim (São Paulo), the Brazilian chemical industry association, were among those killed in yesterday’s crash of a TAM Airlines flight in São Paulo, according to a post on Abiquim’s Web site (www.abiquim.org.br). “The members of Abiquim’s board of directors, and Abiquim officials, regret to inform that Abiquim’s executive vice president Guilherme Duque Estrada de Moraes, adjunct director for regulatory affairs Marta Maria Franco Laudares de Almeida, and the technical adviser Mirtes Suda were victims of the tragedy of TAM flight JJ 3054, on the evening of July 17,” according to a statement on Abiquim’s Web site. Abiquim offered its “deepest condolences to the families of Abiquim’s representatives and to all of the victims of the tragedy.” The flight was arriving in São Paulo from Porto Alegre, Brazil when the crash occurred.

Two recent deals demonstrate how private equity continues to reshape the industry’s landscape by assembling and building leading industry franchises. CVC Capital Partners’ (London) agreement to acquire Univar for about €1.52 billion ($2.1 billion) would further increase the number of top chemical distributors under private ownership (p. 6). Apollo Management’s (New York) agreement, through its Hexion Specialty Chemicals subsidiary, to acquire Huntsman for $10.6 billion, would create a $14-billion/year global differentiated and specialty chemical giant. A sale or merger of Huntsman was inevitable because the controlling shareholders were seeking to sell. Founder and chairman Jon Huntsman had publicly stated his intent to sell his stake in the company to fund his philanthropic efforts. Private equity firm MatlinPatterson (New York), which helped Huntsman avert bankruptcy in 2002 by agreeing to swap its Huntsman bond holdings for a big equity stake in the company, had also been looking to sell its stake, according to financial sources. The deal will likely face a lengthy antitrust review due to overlap in the epoxies businesses. Apollo appears determined to close the deal, betting $425 million that it can gain antitrust approvals. Apollo has agreed to pay Huntsman $325 million if the deal does not close due to the failure to obtain regulatory clearance or financing. It also agreed to pay half of the $200 million breakup fee to Basell. The process may be lengthy but Apollo appears confident that it can live with the conditions antitrust officials in Europe and the U.S. may impose.
Such deals contribute to the blurring of the distinction between “financial” and “strategic” buyers in the chemical industry. Some private equity firms are stepping beyond a simple “buy-and-flip” strategy, building scale, extending their geographic reach, and reducing cyclical risk by acquiring specialty and differentiated businesses. Such strategies previously were associated with industry buyers.

Basell has agreed to acquire Lyondell Chemical for $12.1 billion in an all cash transaction. Basell says it has offered Lyondell $48/share, a 20% premium to Lyondell’s July 16 closing price. The total value of the deal including debt is $19 billion, Basell says. Both companies say they have agreed to the deal. Lyondell is split into three businesses: ethylene, co-products, and derivatives; propylene oxide and related products; and refining. Those businesses will “complement and significantly strengthen Basell’s polyolefins business,” Basell says. Lyondell reported 2006 net income up 38%, to $735 million, on sales up 19%, to $22.2 billion. The combined company will have sales of about $34 billion. Access Industries, the parent company of Basell, expressed its interest in Lyondell in May 2007. Russian industrialist Leonard Blavatnik, who controls Access Industries, purchased the rights to buy an 8.3% stake in Lyondell in May. Lyondell is the latest company Basell has tried to buy. Basell offered to acquire General Electric’s GE Plastics business, but lost out to Sabic. Basell then offered to buy Huntsman, but was outbid by private equity firm Apollo Management earlier this month.

Hexion Specialty Chemicals, owned by private equity firm Apollo Management, has launched a $10.4 billion, or $27.25/share, bid to acquire Huntsman, topping Basell’s previously announced $25.25/share agreement to acquire the company. Huntsman says that a committee of independent directors is evaluating the Hexion bid and “are engaged in discussions with Hexion regarding their proposal.” Basell is entitled to a $200 million payment if Huntsman accepts a higher bid, according to Huntsman. Hexion has agreed to fund $100 million of this payment, according to Huntsman. Hexion has leading positions in epoxy, phenolic, and formaldehyde-based resins as well as coatings and inks. There is overlap in the epoxies business. Hexion says it has a leading 34% global market share in epoxy resins. Huntsman currently ranks third in epoxies globally, and Hexion could be required to divest all or part of Huntsman’s epoxy business to gain antitrust approvals, analysts say. Dow Chemical is the other leading global epoxy producer, and the top-three producers account for about 75% of global capacity for epoxy resins, according to SRI Consulting (Menlo Park, CA). Hexion’s proposal includes a $325 million reverse break-up fee payable by Hexion to Huntsman “in the event the transaction does not close due to the failure to obtain regulatory clearance or requisite financing,” Huntsman says. The Huntsman family and investment firm MatlinPatters on together control a trust that owns 59% of Huntsman stock. MatlinPatterson owns about 55% of that trust, but the Huntsman family retains voting control of the trust, and, in effect, operating control of the company. Huntsman spurned offers from private equity buyers last year, including Apollo, that were in the low-$20/share range last year. Company founder and chairman Jon Huntsman told analysts at a Huntsman investor meeting earlier this year that the company was not for sale “unless I know I can get maximum dollar. I’m not going to give up what I’ve worked my entire life to build when someone comes in with an offer of $23-$24 /share.”