Private Equity’s unique role in chemicals

images[6]I have recently been thinking about Gordon Cain, who was a client and a good friend and, above all, a unique individual. After a successful career as a high level Conoco executive, he put on an entrepreneurial cap and spent a year to consummate the first major private equity transaction in chemicals. This was, in fact, the first leveraged buyout in chemicals. With financial partners, he bought the Conoco Chemicals business from DuPont when that firm wanted to get out of petrochemicals. Cain’s belief that demand at some point has to exceed supply, causing a major price jump, proved correct when the petrochemical industry a few years later, became highly profitable and large amounts of cash flowed into the company, allowing it to pay off its debt ( Let me also add a small footnote for a McKinsey/Chem Systems consulting engagement at that time, where I worked with (pre-Enron) Jeff Skilling to develop a long range plan for the new firm). Cain and his Sterling Group later carried out two other very successful PE deals involving plants spun off by Monsanto, DuPont, PPG and ICI.

In retrospect, Private Equity was certainly in the right place at the right time. The domestic chemical industry, and particularly the petrochemical industry had grown by leaps and bounds in the 1950-1970 period as the postwar boom and the advent of inexpensive plastics and other monomers and polymers lured too many companies to join the traditional producers. After the two oil shocks and the Regan recession, profits became almost non-existent for a couple of years, causing many companies to consider  spinning off unprofitable operations. Cain, and soon other firms (Apollo, Bain Capital, KKR, Texas Pacific, etc), saw an opportunity to buy these properties, allowing the sellers to reengineer their existing operations while providing a great opportunity for the PE firms to make a lot of money with leveraged buyouts.

Now, some thirty years later, PE firms are still carrying out such transactions. With a lack of “targets” , they now often buy each other’s previous acquisitions with the anticipation of future profits thru better management or a better market outlook, but the opportunities available in the 1980s in the petrochemical industry have never been matched (except for a few unusual cases, such as Blackstone’s purchase of Celanese Corporation from Hoechst in 2003, followed by a highly successful IPO in 2005).

You might say that the Yin and Yang of traditional (often termed “Strategic”) companies and PE firms, buying and selling to each other, has involved a complicated relationship that has benefited both sides. And the game continues, as it seems inevitable that a PE firm will acquire the iconic Performance Chemicals Business of DuPont(Titanium Dioxide, Fluorochemicals) that has just been out up for sale as DuPont continues its shift into higher growth businesses (seeds, biochemicals, high value polymers) and PE firms look eagerly at the high cash flow of the businesses DuPont is now divesting.

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