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The private investment firm Apollo Management is combining four of its acquisitions to create Hexion Specialty Chemicals, which will have annual sales of more than $4 billion and will be, Apollo says, the third largest U.S.-based specialty chemical company after Rohm and Haas and Engelhard.
Hexion will combine Borden Chemical, Resolution Performance Products, and Resolution Specialty Materials. Apollo later plans to fold in Bakelite, a German resins maker that Borden previously agreed to acquire. Apollo says the new company will be the world's largest producer of thermosetting resins and enjoy a number one or two share in its major market categories.
Through Borden, the largest of the four entities being merged, Hexion has filed a registration statement with the Securities & Exchange Commission for a proposed initial public offering (IPO) of up to $800 million in common stock in the new company.
Craig O. Morrison, president and CEO of Borden Chemical, will become president and CEO of Hexion, which will be based in Borden's hometown of Columbus, Ohio. Marvin O. Schlanger, a former Arco Chemical CEO and current chairman of both Resolution Performance and Resolution Specialty, will become vice chairman of Hexion.
Morrison told bondholders on a conference call last week that the name Hexion signifies the aromatic ring that is at the core of most thermosetting resin technologies. The x in the name refers both to the thermoset cross-linking and to the four companies that are combining to form Hexion.
He said the combined products and technologies will back a goal of becoming the leading supplier of binders, adhesives, and coating resins to global wood, industrial, and specialty markets. At the same time, Morrison expects the combination to save a total of $75 million in annual raw material, manufacturing, and overhead costs.
Although Hexion is new, the merger and IPO are the culmination of a multiyear program by Apollo to buy unwanted assets from several large chemical companies.
Apollo acquired Shell Chemical's epoxy resins business in 2000 and renamed it Resolution Performance Products. In August 2004, Apollo acquired both Borden Chemical and Eastman Chemical's coatings, adhesives, specialty polymers, and inks business, renaming the latter Resolution Specialty Materials. Borden's deal for Bakelite, a unit of the German firm Rtgers, was announced in October 2004 and is expected to be completed by the middle of this year.
Apollo's strategy is similar to that of fellow investment firms Kohlberg Kravis Roberts & Co. and DLJ Merchant Banking, which have created Rockwood Specialties from parts of the European chemical companies Laporte, Dynamit Nobel, and Novasep. Rockwood filed for an IPO in February.
According to Bill Parkerson, global head of chemicals at Banc of America Securities, this approach involves more than just financial maneuvering. He says the best private investors are often "quasi-strategic players" who integrate businesses, cut costs, and improve company operations.
Hexion and Rockwood will join Huntsman Corp., Celanese, Nalco, and Westlake Chemical as newly public companies. Moreover, several other chemical company IPOs are being considered, including Basell, Arkema, BP's Innovene unit, Kerr-McGee's chemical business, and Nexen's chemical business.
Parkerson says the activity reflects investor interest in the current strength of the chemical business. "In the industry's seven-year cycle, there are certain times when companies have strong cash flows, relatively high valuations, and access to the equity market," he says. "We are in one of those periods right now."
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