Earlier this month, Texas Pacific Group agreed to acquire Kraton Polymers LLC from Ripplewood Holdings for $802 million, including fees and expenses. The purchase price multiple was 7.68 times EBITDA of $104.4 million, for the 12-month period ended Sept. 30.
Although the Morgan Stanley-run auction for one of the world’s largest plastics manufacturers went down to the wire and included buyout giants Thomas H. Lee and JPMorgan Partners, strategic bidders never materialized. “It was not a hotly-contested auction,” said a source close to the deal. “[Strategics] are preoccupied with their own challenges-specifically poor balance sheets and a heavy debt load.”
While TPG won the auction, JPMP will slip in the back door as a significant minority investor in Kraton, according to multiple sources close to the deal. JP Morgan does have a history with Kraton. In 2001, JPMorgan Chase served as advisor to Ripplewood in its purchase of the one-time Shell subsidiary.
Another source close to the transaction told Buyouts the debt portion makes up 70% of the purchase price, and includes a $315 million term loan B, $245 million in junk bonds (which are expected to be no lower than B3/B-), and will be placed by joint bookrunners and lead arrangers Goldman Sachs and UBS. The debt totals 5.37 times EBITDA, excluding a $60 million revolver that will remain undrawn at close.
The equity side of the transaction totals $242 million, and the seller contributed $15 million in cash as part of the deal.
Kraton Polymers operates in 50 countries worldwide, with more than 700 global customers, and is the global leader in manufacturing styrene block copolymers (SBCs). Kraton was created by Royal Dutch/Shell Group (Shell) in 1961 and invented SBCs, a subset of the thermoplastic family of elastomers. SBCs are used for their elasticity and flexibility in a variety of applications including adhesives, asphalts, disposable diapers, footwear, oil gels and roofing materials.
Kraton holds the number one global position in both manufacturing capacity and sales volume, with 30% and 37%, respectively. In 2002, 25% of total sales were generated from products developed since 1997, and the company has more than 1,300 granted and active patents, with nearly 1,000 pending. The Americas, Europe and Africa, and the Asia-Pacific regions make up 51%, 33% and 16% of Kraton sales, respectively.
Ripplewood Gets Into Chemicals
In February 2001, Ripplewood purchased the global elastomers business of Shell Chemicals, a unit of Royal Dutch/Shell Group for approximately $560 million, at 5.5 times EBITDA ($102 million in 2000). Under Ripplewood, Kraton achieved its best financial results ever, raking in $620 million and $125 million in EBITDA, for a solid 20% margin, which was up more than 20% from two years earlier. Kraton watched its costs too, as nonmanufacturing-related costs declined under Ripplewood’s watch to 13.1% from 14.3 percent.
Ripplewood’s purchase price in 2001 was debt-heavy, with $420 million, stemming from $310 million in senior notes and $110 million in senior subordinated notes. Equity totaled $140 million. “Ripplewood served Kraton well,” said a source familiar with the deal but not attached to the firm. “They paid down a significant amount of debt, built up cash on the balance sheet and never used the revolver.”
Additionally, personnel changes during Ripplewood’s ownership were minimal, according to Ian Snow, a managing director with the New York-based buyout shop. Only Kraton’s chief financial officer and general counsel were changed.
Not All Roses
To be sure, Kraton still has a few problems that need fixing. A source close to the deal cites a weak IT system in dire need of an upgrade that could cost more than $10 million to correct. No less important is the $8 million deficit in Kraton’s pension fund, coupled with post-retirement benefit liabilities underfunded by approximately $7 million. However, Snow said: “These issues were not a problem for us, we were able to make due.”
Additionally, increasing competition from Asian chemical companies, a limited global supply of isoprene (used in the production of SBCs) and a heavy reliance on Shell for its isoprene supply may serve as hurdles Kraton needs to clear to increase its already substantial slice of the pie. But the good news for TPG is that competitors are still a long way off, as Kraton’s top four rivals garner roughly the same SBC market share combined as Kraton does alone.
Just to be on the safe side, a source said that one of the ways TPG will look to keep Kraton a step ahead of the competition is by consolidating plants and making inventory reductions, which could lower costs by up to $70 million. “The costs of raw materials, utilities, packaging and freight could also drive the margin one way or the other,” said the source. “TPG will likely bring in a new COO to help cut costs.”
Kraton Isn’t Alone
The chemical industry is a hot sector this year, as more than half a dozen LBOs have taken place involving private equity firms. The Blackstone Group’s $4.2 billion buyout of Ondeo Nalco is the largest chemical-related LBO to date (see Buyouts, 9/22/2003). Prior to Blackstone’s deal, Goldman Sachs held the record, with the $2.2 billion buyout of Cognis, a subsidiary of Henkel in October 2000. Other buyouts in the sector during 2003 include the $64 million purchase of Rutherford Chemicals by Arsenal Capital Partners and the purchase of UCB’s Tamico methylaminies and derivatives business by NIB Capital for roughly $133 million.
With strategic buyers steering clear of chemical buyouts, assets should remain affordable for private equity shops, both in the U.S. and Europe. Purchase price multiples have dropped to the neighborhood of 6.5 times from more than 10x just six years ago. Many parent companies housing these potential spinoffs (mostly larger chemical or oil conglomerates) have recently seen a drop in earnings performance and are looking to shed debt.