In 2002, General Electric foiled The Blackstone Group’s attempt to acquire Betz Dearborn, the world’s second-largest provider of wastewater treatment services. But rather than hang its head in defeat, Blackstone turned its eyes to an even greater prize.
The wastewater treatment and process-chemicals company, with more revenue than Betz Dearborn, is Naperville, Ill.-based Ondeo Nalco, which had been owned since 1999 by French conglomerate Suez SA. Last year, debt-ridden Suez joined the corporate divestiture parade by putting Nalco on the block.
Blackstone immediately jumped into the fray, along with Apollo Management, Goldman Sachs Capital Partners, Kohlberg Kravis Roberts & Co. and Clayton, Dubilier & Rice. Press reports initially put KKR in the lead with a $4.5 billion bid, but market insiders gave CD&R the edge thanks to its limited-partner relationship with ex-GE Chief Jack Welch.
In the background, however, Blackstone was working hard on an upset. The firm signed exclusive financing agreements with both Citigroup and Bank of America, plus indicated a willingness to drop all market MAC language from the proposed term sheet. Most importantly, it was leveraging the knowledge it had gained four years earlier on the Betz Dearborn deal.
“Our key advantage was just understanding the industry well, which conveyed to the seller that we knew what we were doing, could move quickly and close the deal quickly,” says Chinh Chu, a managing director with Blackstone. “It also helped that we already knew some of Suez’s senior executives because of an existing corporate partnership with Jones Corp.”
New York-based Blackstone also didn’t need to compete with GE, which was barred from competing due to anti-trust regulations. In the end, KKR dropped out, Welch struck out and Blackstone’s intangibles carried the day.
The winning bid was worth approximately $4.35 billion, including just $1.1 billion in equity (26 percent). While Blackstone certainly had enough cash to cover its tab, the firm was not terribly comfortable with so much exposure to one company. It began trying to syndicate the deal, but never had to look further than one-time competitors Apollo and Goldman Sachs.
“When we signed the deal, we didn’t have any knowledge or guarantees that Apollo or Goldman would come into a syndicate with us,” Chin explains. “We were confident that we could syndicate it … but we obviously were willing to be the only equity investor if somehow the syndicate hadn’t worked out.”
In reality, however, it would have been very surprising for the syndication deal to have not worked out. Blackstone already had demonstrated its flexibility when removing the market MAC to appease Suez, and followed a similar course when Apollo and Goldman demanded equal equity stakes in the deal.
Rather than making the entire process easier, however, Blackstone’s inclusion of Apollo and Goldman Sachs prompted a lending community battle. Citigroup and Bank of America had been granted exclusivity arrangements with Blackstone, but Blackstone was now sharing its “deal lead” status with two other firms. As such, banks affiliated with Apollo and Goldman Sachs also wanted a piece of the action.
After some contentious conversations, all of the banks agreed to a compromise that included Citigroup coming out on top. The financial giant would lead the entire financing (worth approximately $100 million in fees), but would share a “joint global coordinator” title with BofA. Other firms involved in the bank loan and bond offerings included Deutsche Bank and J.P. Morgan Chase, while Goldman Sachs and UBS Investment Bank signed on just for the bond portion. The acquisition of Ondeo Nalco Co. (later renamed Nalco Co.) went relatively quickly, but nonetheless included rival bidders, bickering lenders and multiple accountants needed to reconcile French and U.S. GAP requirements. It also was the year’s second-largest LBO, ranking just behind Blackstone’s $4.73 buyout of TRW Automotive from Northrop Grumman Corp.
But neither complexity nor size was the primary factor that made this deal so appealing. Instead, the decision was driven by dollars and sense.
The first part of that equation came in the form of $450 million worth of senior discount notes, which were issued less than three months after the Nalco deal was formally closed. Some existing bondholders accused the participating buyout shops of unfair profit-taking, although Chin Chu has publicly denied that charge. Whether the accusation was fair or not, Blackstone, Apollo and Goldman Sachs were able to provide near-immediate returns to their limited partners, while simultaneously reducing their exposure to Nalco.
In addition, the Nalco deal included Blackstone’s impressive ability to leverage past due diligence. For example, the firm was forced to find a new chief executive after existing Nalco CEO Christian Maurin said that he’d prefer to stick with Suez once the buyout was completed. Blackstone and its partners hired an executive search firm, but ultimately went with Bill Joyce, CEO of former Betz Dearborn parent company Hercules Inc.
“We had a previous relationship with Bill Joyce because we had looked at Benz Dearborn for over a year, and he was always the guy we wanted,” Chu explains.