Private Equity Bids To Take Over TPC Group

Two private equity firms, SK Capital Partners and First Reserve Corp., are teaming up to buy TPC Group, the Houston-based niche processor of butadiene and other C₄ chemicals in a transaction valued at $850 million, including debt.

TPC, formerly known as Texas Petrochemicals, generated net income of $37 million on sales of about $2.8 billion in 2011. Some 83% of its revenues come from processing “crude C₄s” into components such as butadiene and 1-butene as well as the production of the fuel additive methyl tert-butyl ether. The rest of its sales come from making specialty C₄ derivatives such as polyisobutylene, diisobutylene, and nonene.

SK Capital is no stranger to the chemical industry. Its portfolio includes the former Solutia nylon business, Ascend Performance Materials, which it acquired in 2009. First Reserve focuses more on the energy sector and has companies such as Abengoa and Glencore in its portfolio.

The private equity bid seems to confirm published reports, which have been circulating since July, of a potential TPC takeover. Earlier this month, TPC CEO Mike McDonnell, during his company’s most recent earnings conference call, warned analysts he wouldn’t comment on “rumors or speculation.”

TPC management says the offer price of $40.00 per share represents a premium of 20% over the value of TPC shares on July 24, which was prior to reports of a possible deal. Shareholders who represent 22% of TPC’s equity have agreed to vote in favor of a deal. Michael E. Ducey, TPC’s chairman says the agreement is the culmination of a strategic review TPC’s board began late last year. He says the deal “appropriately recognizes the value of TPC’s groups and prospects and provides our stockholders with an immediate cash premium for their valued investment.”

However, Thomas E. Sandell, CEO of Sandell Asset Management, which owns a 6% stake in TPC, wrote to TPC management to express his “outrage” over the low price of the deal. On Aug. 27, the day the bid was announced, shares of TPC inched above the $40.00, an indication that shareholders may be looking for a sweetened offer.

“This appears to us to be a classic case where management, fully aware of the company’s significant inherent value and of the impending catalysts which will unlock it, deliberately fails to communicate that value to the market and instead attempts to steal the company at a grossly suboptimal price,” Sandell wrote, noting that a more appropriate valuation of the firm would be more like $55.00 to $57.00 per share.

The feedstocks that TPC processes are by-products from ethylene cracker complexes. With the emergence of natural gas petrochemical feedstocks from shale in recent years, such crackers are increasingly processing ethane, which yields less by-product than naphtha-based feedstocks.

The limited supply of C₄s from crackers has created difficulties for TPC. But TPC is trying to circumvent this problem by tapping into shale-based feedstocks such as butane. The company plans to restart an idled dehydrogenation unit that makes isobutylene from isobutane and is also planning to build a plant that would make butadiene from n-butane.