Catalyst

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.

Third-quarter earnings reports this week promise to show how well chemical makers are coping with the slowdown in U.S. manufacturing and with surging energy and feedstock costs.
Census Bureau data shows that U.S. exports, aided by a weakening dollar, are picking up the slack in U.S. demand. Domestic exports of chemicals gained 6.9% in August, to $13.5 billion, and chemical imports fell 6.3%, to $12.7 billion. The chemical trade balance swung from a deficit of $820 million in July, to a surplus of $1.13 billion in August. Improvements were across the board, according to ACC’s analysis of the data. This is one of the few monthly surpluses for chemical makers since trade surpluses turned to deficits in 2001.
PPG Industries, an early earnings reporter, last week said it expects the North American economy to grow slightly in the fourth quarter aided by higher exports, albeit at a slower pace (p. 10). “We currently see evidence of customers cautiously managing or even paring inventories, due to conflicting economic projections,” says PPG CFO William Hernandez. “Also, we see no signs of improvement in residential construction, which may result in customer outages in a seasonally slower fourth quarter.” Non-residential construction, one of the bright spots in the U.S. economy, is holding up, though there are signs that growth may be peaking. “Regarding commercial construction, there is anecdotal evidence of certain sub-segments hitting a plateau, while other sub-segments continue to grow nicely.”
Demand outside the U.S. is expected to remain solid, however. “We anticipate Europe will continue to grow at nice levels, but slightly slower than has been recorded over the past few quarters,” Hernandez says. “Meanwhile, we are pegging the other emerging economies, including China, to continue with their current pace.”
Growth and momentum have clearly shifted away from the U.S. How well producers do in capturing growth outside the U.S. will go a long way in determining whether the industry’s healthy margins can be sustained into next year.