European Deal of the Year: Celanese –

Though the warm-up took two years, The Blackstone Group hit a home run when it invested $650 million in German chemical giant Celanese AG last April.

In one of the most complicated transactions in the history of the firm, the New York private equity group made an estimated 4.5x its investment in less than a year, helping it win Buyouts’ European Deal of the Year.

Blackstone approached the table with a strategic partner who wanted to buy Celanese’s plastics business, known as Ticona. But after nine months of work, the partner (rumored to be GE) changed its strategic focus and dropped out of the deal, essentially leaving Blackstone alone at the altar. Determined to complete the transaction, Blackstone decided to go the distance alone and purchase the entire business for $3.8 billion.

The risk paid off. The firm withdrew $500 million of its original investment in Celanese when the company did a junk bond offering and used the money to pay a dividend to Blackstone. At the time of the initial public offering in January, it took out another $800 million. Blackstone still owns more than 60% of the company, a piece estimated to be worth $1.6 billion.

The transaction is remarkable for a number of reasons. At the time, it was the largest-ever public-to-private buyout in Germany. It also was the first-ever dual-listed buyout in German and U.S. markets. The deal also had to follow the German takeover code and the SEC rules, as well as other U.S. requirements, making it extremely complex.

“It was just the most complicated deal I have ever seen by a margin,” said David Bradley, a managing director and head of the global chemicals group at UBS Securities LLC. “There isn’t another private equity firm in my view that could have gotten their head around this.”

Mark Epley, head of the financial sponsors group in the Americas at Deutsche Bank AG, was Blackstone’s advisor on the acquisition and also assisted in the financing of the transaction. “We had to create an acquisition holding company and finance that separately, which required a significant amount of offshore financing early on in the deal, and we had to create structures that had never been done before to accomplish that,” Epley said.

Early on, Blackstone saw through the challenges and identified a diamond in the rough. Originally based in the U.S., the undervalued company became publicly traded on the Frankfurt and New York stock exchanges when Hoechst AG, a German company, purchased it in 1999.

Hoechst later spun it off, leaving Celanese German domiciled, with more than 60% of its revenues and EBITDA in the U.S. According to Riccardo Benedetti, a managing director in Morgan Stanley’s M&A department, Celanese was in a challenging capital markets predicament. It was domiciled in Germany, but its operations and business remained strongly oriented towards the U.S. Investors interested in exposure to a German chemicals company would rather focus on BASF AG, Degussa AG, Bayer AG and others, while investors interested in the U.S. would focus on companies like Eastman Chemical Co., Lyondell Chemical Co. and Rohm and Haas Co., said Mr. Benedetti, who is based in New York. Morgan Stanley advised Blackstone on the transaction.

Blackstone also benefited from timing. The firm bet that the chemical cycle would pick up significantly at the end of 2003 and in 2004. Since Blackstone bought Celanese, its EBITDA has grown more than 25 percent. According to Bradley, performance in this business in 2004 was roughly where the analysts were expecting it to be in the top of the cycle in 2006. “The transformation has just been incredible,” he said.

In short order, Celanese realized cost reduction opportunities and growth potential. Since the companies closed the deal in April, Celanese announced two acquisitions-Acetex and Vinamul Polymers.

The speed with which Blackstone repositioned the company is also notable, Deutsche Bank’s Epley said. Blackstone brought in a new chief financial officer, improved earnings, took costs out and repositioned it as a global chemicals company, allowing the IPO to get U.S. demand, he said.

While Chinh Chu, the Blackstone partner who orchestrated the deal, could not speak about Celanese itself because of the IPO, he spoke to the chemicals business: “We’ve invested a lot of time and we’re happy with our standings as it relates to Nalco and Celanese.” (Blackstone, together with Apollo Management L.P., and Goldman Sachs Capital Partners, announced a $4.2 billion transaction in Sept. 2003 for chemical company Ondeo Nalco.)

“We are pleased with our focus and record of success in the chemical sector having completed the largest two chemical deals,” Mr. Chu said. “We did not pull the trigger on the first two and a half years we looked at deals because we thought it was not the right time and it was overpriced,” he said.

They bought Celanese at the right time in the cycle and “managed to combine the benefits of an upturning cycle with cost reduction initiatives, value-enhancing bolt-on acquisitions and the re-domiciling to the U.S.,” Morgan Stanley’s Benedetti said. “I have to believe that this is one of the most successful deals that a financial sponsor has done in the recent past,” he said.