In Pursuit Of Purity

Private equity firm New Mountain Capital signed an agreement late last month to buy laboratory chemical supplier Mallinckrodt Baker for $280 million in cash. The acquisition, from medical supply firm Covidien, will make New Mountain a player in the specialty chemical field. It also marks the reentry of Raj Gupta, Rohm and Haas’s former chief executive officer, into the chemicals arena. Gupta will become chairman of Mallinckrodt Baker when the transaction closes by the end of September.

What New Mountain will get is a maker of high-purity chemicals, sold under the venerable Mallinckrodt and J. T. Baker names, that had sales of $414 million in 2009. Customers include pharmaceutical, chemical, and university labs, as well as drug, semiconductor, solar-cell, and flat-panel-display makers.

Until now, explains Matthew Holt, a New Mountain director, the private equity firm has invested in areas such as education with Strayer University, software with RedPrairie Holding, and medical devices with Ikaria Holdings. New Mountain focuses on firms in niche growth markets that tend to do well in good and bad economies.

Managing about $8.5 billion in assets, New Mountain has invested in about 18 companies over its 10-year history and still holds most of those investments. Rather than look for a quick turnaround, Holt says, the private equity firm believes in a long-term business-building process. He suggests that New Mountain doesn’t expect to cash out of Mallinckrodt in just a few short years.

Gupta tells C&EN that he joined New York City-based New Mountain as a senior adviser in July 2009 to help it learn about specialty chemicals and materials. As chairman of Mallinckrodt, Gupta won’t be involved in day-to-day management. He says he’ll “be in a position to help Mallinckrodt grow organically and through acquisitions” while he helps New Mountain assess other specialty chemical opportunities.

Gupta characterizes the high-purity-chemical business as “very fragmented,” implying that a firm such as Mallinckrodt should be consolidating it. Competitors on the laboratory-chemical side of the industry include Fisher Scientific, Sigma-Aldrich, and Honeywell’s Burdick & Jackson. In electronic chemicals, KMG Chemicals has been a consolidator. It bought businesses from Air Products & Chemicals in 2007 and from General Chemical earlier this year.

The high-purity-chemical business has growth potential in Asia, where chemical research is blossoming and where many of the world’s major electronics makers are based, Gupta notes. However, he stops short of saying that Mallinckrodt will build or acquire manufacturing capabilities in Asia.

Mallinckrodt currently has 1,100 employees and facilities in Phillipsburg, N.J., and Deventer, the Netherlands. It also has access to toll manufacturing capacity at a Covidien plant in Mexico City. Gupta says Mallinckrodt already has a competent management team in place, but he envisions adding new managers to provide the corporate services the firm will lose when it separates from Covidien.

One thing Mallinckrodt and Gupta won’t have to worry about is servicing a large debt. Holt emphasizes that his company is somewhat unusual among private equity investors in eschewing bank debt and buying businesses outright for cash. According to New Mountain’s website, the firm emphasizes growth, rather than debt, as the way to generate “exceptional” returns.

Instead, Mallinckrodt managers will be able to concentrate on bringing new products from its research labs to market. The company will also be in a position to act on acquisition opportunities by relying on New Mountain’s deep pockets.

That doesn’t mean Mallinckrodt won’t try to reduce costs and find operating efficiencies, Gupta says. But Holt emphasizes that New Mountain’s approach is to “build value through growth rather than cost‑cutting.”

Gupta himself has a lot of experience building strong franchises. At Rohm and Haas, he helped develop a close-to-$2 billion electronic chemical business before selling the firm to Dow Chemical. He might well see Mallinckrodt as a platform on which to do this again in the fragmented field of high-purity chemicals.