Issue Date: June 29, 2009
The stereotype of the private equity firm is a group of financially savvy executives who buy faltering businesses they don’t know much about and then use their fiscal wherewithal to restructure, squeeze, and otherwise force them back to health.
The people at SK Capital Partners (SKC), which just acquired Solutia’s nylon business, no doubt know their dollars and cents. But they also know something about nylon.
Barry Siadat, one of SKC’s two founders, is a Ph.D. chemical engineer who for many years was an executive at Allied-Signal, a one-time rival of Solutia in the nylon business. And Frederic Poses, the nylon business’ new chief executive officer, was with Allied-Signal for 30 years, the last two as president.
Aided by an employee survey, Siadat and Poses have renamed the business Ascend Performance Materials, a nod to its Ascend brand of nylon for fibers. They are now reaching out to their industry contacts and trying to assure them that, after years of uncertainty and amid a deep downturn, this nylon business is in good hands.
Siadat and partner Jamshid Keynejad founded SKC in 2007 to acquire specialty material and chemical businesses no longer wanted by their corporate parents. Siadat had earlier been a cofounder of Arsenal Capital Partners, which bought firms such as Rutherford Chemical, Reilly Industries, and Velsicol Chemical.
The strategy remains the same at SKC. “We invest in noncore assets of companies where we may have a strategic view and prior experience we can bring to that asset. We love it and give it a new life,” Siadat says.
SKC’s first deal, completed about a year ago, was the purchase of Aristech Acrylics from Mitsubishi Corp. Not long after, Solutia put the nylon business up for sale to focus on what it considers its more specialized operations. Siadat was immediately interested. “The reason we were interested is we saw a business with great customers—customers we know,” he says.
Siadat was also interested in Poses, his one-time boss at Allied-Signal, as a possible CEO. After Allied-Signal, Poses had spent close to a decade with the conglomerate American Standard. Over the years, he broke it up into three separate businesses. In 2008, he sold the last portion to Ingersoll Rand, effectively putting himself out of a job.
Reunited, Poses and Siadat completed the nylon purchase on June 1. They got the world’s second-largest producer of nylon 6,6 resin and one of only two large players—the other is Invista, the former DuPont fibers business—to be fully integrated into the nylon raw materials adipic acid and adiponitrile.
SKC paid the seemingly bargain-basement price of $50 million, plus $4 million in deferred payments, for an operation that had sales of close to $1.8 billion last year. A stock analyst at Goldman Sachs predicted last fall that the business would sell for up to $700 million.
The low price reflects the nylon industry’s high sensitivity to the vicissitudes of the economy. Two big nylon markets are home construction and auto manufacturing, and both are deeply in the doldrums, notes Robin MacDonald, a former nylon executive at ICI and DuPont who now runs the consulting firm PCI Nylon. “When nylon is doing well, you’re printing money,” he says. “When it’s doing badly, it’s breathtakingly impoverishing.”
Making matters worse for Solutia, many potential industrial buyers were preoccupied with their own problems, and most private equity buyers were on the sidelines. But Poses and Siadat saw a business that, although hurting along with the rest of the chemical industry, was essentially sound and poised to rebound.
“The basic uses for this product haven’t changed,” Poses says. “We can’t forecast that the industry has turned around, but if we are not at the bottom, we are close to it.”
The business lost money in 2008 and in the first quarter of 2009, but Poses insists this was not unusual for a chemical business during that time—especially one that was up for sale and in the midst of restructuring.
One big restructuring step Solutia took was shutting down nylon fiber capacity in Greenwood, S.C., and Pensacola, Fla., and shifting equipment to making nylon engineering plastics. Overall, it pared about 1,500 employees from the business. Today, Poses says, Ascend has a little more than 3,000 employees. “That rescaling of the business was important,” he observes.
The changes were indeed necessary but too late, says MacDonald, who counts Ascend as a client. “They should have started five years before,” he says.
Solutia was slow in adapting to the carpet industry’s move away from staple fiber and toward bulk continuous filament, according to MacDonald. The problem wasn’t pressing during the U.S. housing boom of 2003–05. “Then came the downturn, and it has been brutal,” he says.
Going forward, though, Poses and Siadat argue that the nylon business will thrive in more stable and committed hands. Solutia was bankrupt from 2003 to early 2008. Three months after emerging from bankruptcy, the company announced that it wanted out of nylon. Those years were difficult for the business’ employees and customers, Poses points out. “There was a lot of uncertainty,” he says.
Thad W. Simons, CEO of Novus International, an Ascend customer, agrees. Novus is one of the world’s largest producers of the animal-feed additive dl-methionine. Its main plant is in the middle of Ascend’s Chocolate Bayou, Texas, complex, where it uses by-product hydrogen cyanide from Ascend as an important raw material.
Although relations between the two firms have always been good, Simons observes, now the nylon business is controlled by a strategic owner. “They have operators who have a vision for the business,” he says. “It’s a great improvement.”
Ascend is looking for more customers like Simons who buy the chemicals involved in nylon production. Although Ascend is known for nylon, fully 42% of its sales are chemicals. Roughly half of them are nylon intermediates such as adipic acid and adiponitrile, and half are other chemicals related to nylon.
One example is the family of dibasic acids and esters created during adipic acid manufacturing. Invista, Ascend’s biggest rival in nylon, has historically been better at exploiting nylon-related by-products, PCI’s MacDonald notes. But now that Invista is shutting down intermediates production in Canada and the U.K., Ascend has an opportunity to step in, he says.
Siadat has other ideas as well. He points out that Ascend oxidizes propylene in the presence of ammonia to form acrylonitrile, the firm’s raw material for adiponitrile. The technology has parallels to the ring compound ammoxidation practiced at Reilly and Rutherford, companies Siadat helped acquire and run while at Arsenal.
“Ammoxidation gets you into nitrile chemistry for markets such as agriculture, feed, and pharmaceuticals,” he says. “We are looking to build on that capability, do more with current customers, and hopefully find new customers.”
On the topic of expansion, the Ascend executives talk modestly. Rather than push through sweeping changes, they plan to use their long chemical industry experience to fine-tune a basically solid business. “You go in with a fresh set of eyes, and you are going to see different things,” Poses says.
MacDonald considers their chances good, if only because they bought in at what looks like the bottom of the business cycle. “Timing is a lot in this business, and I think their timing has been good,” he says. “When the mists clear, they will be a pretty formidable competitor.”
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