It wasn’t many years ago that a dearth of new products threatened to spell doom for Chemtura’s polymer additives business. But in November 2012, it was sold to SK Capital Partners, a private equity firm, for $200 million. Now called Addivant, the 500-employee business is a stand-alone company with a new lease on life. It plans to introduce new products and expand its presence in North America, the Middle East, and Asia.
SK’s purchase of Middlebury, Conn.-based Addivant highlights the growing attractiveness of chemical businesses for private equity investors. And among private equity companies, SK has emerged as a specialist that owns and operates chemical businesses for the long term. Since early 2008, it has bought, or taken a large stake in, six chemical firms in segments such as acrylics and textile chemicals.
Remaking Addivant and keeping it viable will not be easy. “This business was in a troubled space for a long time,” says John P. Rogers, senior vice president at the credit rating firm Moody’s Investors Service. “Success is feasible, but to turn that business around you have to add to the product line to fill out the portfolio, and tighten customer relationships.”
Although the road is sometimes uphill, private equity companies such as SK have become adept at recognizing the potential of chemical businesses that have been neglected by their parent corporations. Large, publicly traded firms take their investment cues from shareholders, stock analysts, and global megatrends to focus in areas with high growth potential. To do that, they stop investing in some older, noncore businesses.
But for these businesses, noncore does not necessarily mean unprofitable. “While they may not have significant high growth potential, they can still be run profitably for a return of 8 or 9%. They fit well for private equity, where investment models focus on returns in the here and now,” says Mike Shannon, head of chemicals at the consulting firm KPMG.
Barry Siadat, SK’s managing director, agrees. “Someone has to go for the megatrends, and public companies are better positioned to do that, to go after the next wave in areas like seeds or renewables,” he says. “What I do is try to make sure those products and materials that have been a main staple for our lifestyles are also cared for and not neglected.”
Critical to automotive, packaging, electronics, and construction materials, additives that improve the life span of rubber and polymers are examples of such staple products. But in recent years polymer technology has been advancing faster than additive technology.
“Demands on polymers are higher than ever before, but the additives used in them are 35–40 years old,” points out Peter R. Smith, Addivant’s CEO. Smith joined Chemtura in 2008 and was put in charge of the firm’s business in polymer antioxidants and ultraviolet stabilization agents a year later. Smith’s team saw an opportunity to bring those additives up to date. “We invested in research and development and brought in high-caliber chemists,” he says.
But bringing new products to market requires financial backing for operations, marketing, and regulatory approvals. At Chemtura, that backing was not forthcoming. “Our customers, to be frank, were complaining. They saw the potential but didn’t see us execute,” Smith recalls.
In March 2009, Chemtura filed for bankruptcy reorganization, and it became clear to Smith that his division was no longer important to the company. “Chemtura cut resources in a lot of core functions, and there had been discussions about selling the business in those early days,” he says.
SK’s Siadat says it is a common story. “Many times the former owner will try to improve profitability by cutting costs—first to operations and R&D, then to marketing. You see businesses that are devoid of the things that would make them grow and get them humming.”
Private equity firms are ready to give such businesses a home. In 2012, the largest deal in the chemical industry was DuPont’s $4.9 billion sale of its coatings business to the Carlyle Group. Other private equity firms that have moved into chemicals include Bain Capital, Advent International, Blackstone, and Apollo Management. Just one month after buying the Chemtura additives business, SK also bought Clariant’s textile chemicals, paper specialties, and emulsions units.
Private equity’s thirst for chemical companies jumped in the years before the Great Recession. In that era of cheap credit, they bid up the price of chemical businesses, figuring they could hold them for a few years before taking them public or flipping them to another firm for even more money.
Now private equity firms do their homework, pay a fair price, and plan to hold companies for much longer. “Back in 2006 if you were in management, you’d be concerned if your noncore business was acquired to be flipped,” says Paul Harnick, chief operating officer for chemicals at KPMG. “Now you can be happy about not being in the deepest, darkest corners of a corporation. You can get more focused attention and feel a lot more loved with a new owner.”
SK considers itself part of this new generation of investors. “We don’t even call ourselves private equity,” Siadat says. “We’re building a portfolio of businesses, and we are strategic, not just buy and sell.”
Smith, in fact, was relieved that SK came calling. “SK was known to us as very focused on our industry,” he says. “There was a realization that we were talking to industry experts, and it differentiated them in our minds from classic private equity.”
Now, Addivant is positioned to take on a role as an innovator, Smith says, with SK making the investments needed to bring his team’s new-product pipeline to market. That includes beefing up the company’s talent pool by adding more chemists and chemical engineers to its current team.
Addivant is using its expertise to develop additives that help polymers work better on modern film packaging lines, which can run at up to 1,000 meters per minute. Another effort is to provide additives that protect the integrity of polymers over decades of use, particularly in applications such as underground electrical cables.
The company also has plans to increase capacity and expand globally, including through joint ventures in the Middle East, a hot spot of upstream polymer production, and in Asia, which has emerged as a growing base of polymer customers. Meanwhile, as the largest antioxidant producer in North America, Addivant plans to serve the domestic polymer market, which is forecast to expand with the shale gas boom.
“We’ve been given a tremendous platform to build something quite special,” Smith says. “The new owners have a real interest in seeing this business prosper and grow. They have come forward with investment funds and say more will come. It has released a lot of latent energy and excitement among our employees.”