Catalyst

Private equity buyers have conducted about 80% of the M&A in the distribution sector in the last year, Marc Fermont of DistriConsult told attendees at the National Association of Chemical Distributors’ (Arlington, VA) annual meeting, held this week at Fajardo, P.R. There are both positive and negative implications of this change, he says. These include the creation of some “dynamic” companies, like Azelis, as well as an emphasis on a “buy and build” strategy rather than organic growth, Fermont says. There is also likely to be pressure on private equity-owned distributors to reduce their inventory levels and increase customer prices, he adds. While the entire distribution sector remains vast with many small- to mid-size firms, some argue that the major global players are the force to be reckoned with, the ones that ultimately shape the industry. The fact that private equity firms are in the driver’s seat at most of the major distribution firms has raised at least one pressing question: Is this necessarily a bad thing? What do you think?

CW website’s ‘Quote of the Day’ today illustrates an alarming state of affairs regarding the counterfeiting of pharmaceuticals. The quote, “These guys have got some balls,” was made by a spokesman for China’s State Food and Drug Administration (SFDA) on criminals who set up a fake version of the drug watchdog’s website to promote their own ‘miracle’ drugs, so says a report by Reuters.

So now we know what industry groups such as SOCMA and the European Fine Chemicals Group, among others, are up against. As fine chemical manufacturers what are your experiences of pharmaceuticals counterfeiting and how do you think the industry should respond?

Leading industry executives are lining up to support the 2008 U.S. presidential campaign of Republican Mitt Romney, according to a review of contributions filed with the Federal Election Commission (FEC; Washington). Romney, the former governor of Massachusetts and co-founder of private equity firm Bain Capital, has an impressive roster of industry support.
All four of ACC’s 2007 officers have contributed to Romney’s campaign: Andrew Liveris, Dow Chemical chairman and CEO and ACC board chairman; Robert Wood, Chemtura chairman and CEO as well as chair of ACC’s executive committee; David Weidman, Celanese chairman and CEO and ACC board vice chair; and Jack Gerard, ACC president and CEO. Gerard is also serving as a national finance co-chair for Romney. Several other executives have also contributed to Romney.
Romney’s positions on education, energy, and research sync well with views of many in industry. An energy position paper issued by Romney calls for “efforts related to conservation and efficiency measures, developing alternative sources of energy like biodiesel, ethanol, nuclear, and coal gasification, and finding more domestic sources of oil such as in the Arctic National Wildlife Reserve or the Outer Continental Shelf.”
Romney also supports greater investment in materials research. “Corporations today spend more on tort liability than they do on R&D,” another Romney position paper states. “While the government already invests heavily in defense, space, and health technologies, it is time to invest substantially in technologies related to power generation, nanotechnology, and materials science.”
Support is not unanimous, however. Nova Chemicals chairman and CEO Jeff Lipton has contributed to both Romney and Republican presidential candidate Rudolph Guiliani, the former mayor of New York City, according to FEC filings. Rohm and Haas chairman and CEO Raj Gupta, meanwhile, has contributed to the campaign of leading Democratic contender Hillary Clinton.

The ongoing credit crunch has put the brakes on large chemical M&A deals. Activity has slowed after a frenzied spring and early summer that saw $1-billion-plus deals frequently surface. Investment banks still need to place $200 billion-$300 billion in leveraged buyout (LBO) financing that was committed before credit markets froze in July. Banks are reluctant to fund further big deals until those loans clear, analysts say. Among big industry deals in the pipeline are Basell’s pending acquisition of Lyondell Chemical, which has $21 billion in debt financing attached, and Apollo Management’s planned acquisition of Huntsman, through its Hexion unit, valued at $10 billion including debt.

“In practical terms this means that for the next few quarters we may not see another Hexion-Hunstman transaction sponsored by a large private equity fund,” says Chris Cerimele, senior v.p. at Lincoln International. “At least, probably not in the U.S.”

Attention and activity is shifting toward deals in the middle market, or those with lower price tags. “Funding is still available for smaller deals, it’s just that the loan cost is 150 basis points (1.5 percentage points) more expensive than it was earlier in the year,” says one executive at a private equity firm that targets transactions as large as $500 million.

Deal structures are changing and terms have become more “lender friendly,” Cerimele says. “Previously a single lender would fully underwrite a deal and then syndicate post-closing,” he says. However, “we are now seeing the return of club deals, with pre-close syndication required,” he adds. Buyers are putting up more equity, and loan pricing is higher, Cerimele says. “Covenants, which had begun to disappear during the height of the market in the first half of 2007, are now reappearing,” he says.

Chemical makers, particularly those with strong balance sheets, appear better positioned now that private equity faces financing constraints. Producers say they are evaluating acquisitions, particularly bolt-on deals, but are, so far, still cautious. M&A activity is likely to be tempered by the credit crunch and concerns over the economic outlook, says Wesley Chinn, chemicals analyst with Standard and Poor’s (New York). “However, the shakeup in M&A appears to create some opportunities for chemical companies looking for strategic assets,” because firms previously faced stiff competition from private equity firms.