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alchemistthe

Clearwater International’s half-year chemicals sector commentary Summer 2014

Golden deal Sale of Amber Chemical

Doing turnaroundsMike Polkinghorn

Indian revivalWhat Modi means for M&A

PE focusVespa Capital

RETURN OFTHE DOLLAR US trade buyers on the global hunt

GLOBALCHEMICALSDEALS

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Much of the new-found appetite fordealmaking in the US is being driven by theliquidity of its debt markets, as lendersoffer increasingly aggressive terms andnew capital players enter the market.

A big factor behind the wider confidence isthat US corporates which have lived throughthe recession have now successfully paiddown much of their debt, which makesthem an attractive investment proposition.

global forces are driving the chemicalindustry. Amber, which manufacturesspeciality silicones, has built up a globalpresence in response to the specificdemands of its blue-chip clients. Servingcompanies in the aerospace, automotive,chemicals processing, electronics, foodprocessing, personal care, and watertreatment sectors, Amber operates plantsin the UK, Italy, China and the US.

So, where are they spending their money?Europe remains a strong source of interest,typified by the sale of Amber Chemical tothe US ICM Group, a buy-and-build vehiclebacked by Californian Private Equity (PE)player Century Park Capital Partners.

The deal, on which Clearwater Internationaladvised, is an excellent example of how

A business like Amber brings hugeopportunities for ICM, which can now tapinto Amber’s product development inspeciality silicone compounds whilesupporting its global ambitions.

Another dynamic to the US chemicalsmarket is the shale revolution whichcontinues to cause ripples around the globe.

the alchemist | Summer 2014

2welcome

Driven by its strengthening economy and increasing investorconfidence, US corporates are on the M&A march.

Welcome

“Amber has built up a global presence in response tothe specific demands of its blue-chip clients.”

As Guy Zaczepinski from Century Park tellsus, there has been a “tectonic shift” and theUS could end up re-shoring a lot of itsmanufacturing industry, especially in thecapital intensive chemical sector.

Another tectonic shift is happening in India,where new Prime Minister Narendra Modihas promised wide-sweeping reforms whichhave the potential to transform the economiclandscape of the country. In this issue, ourIMAP partner assesses the prospects froman M&A viewpoint and looks at what it couldmean for the chemical industry.

We hope you enjoy the read.

Constantine BillerGlobal Head of Industrials & Chemicals

The alchemist is published by Clearwater InternationalEditors: Jim Pendrill and Sarah FernandezDesign: www.creative-bridge.comSubscription: [email protected] part of this publication may be reproduced orused in any form without prior permission ofClearwater International

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Contents

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5featuref

8profilef

10interview

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14PE focusf

Meet the teamConstantine BillerGlobal Head of Industrials & Chemicals

+44 (0)845 052 [email protected]

Philip NuttallPartner

+44 (0)845 052 0343

[email protected]

John JensenPartner

+45 20 33 47 [email protected]

Simon ZhangPartner

+86 6341 0699 [email protected]

José-María AlberúDirector


Carsten RydahlSimonsenDirector

+45 27 62 03 [email protected]

Daniel JuradoAssociate


4deals

Quimitecnica.com

Quimitecnica.com, a Portuguese chemicaldistribution company present in Iberia andAfrica, has acquired Cofarcas, a Spanishchemicals distributor.

Quimitecnica has recently been expandingits scope of activities into the watertreatment, speciality chemicals, logisticsand engineering sectors, with four logisticsunits in Portugal plus operations in Spain,Morocco, Algeria, Egypt, Angola andMozambique. The acquisition forms part ofQuimitecnica’s wider strategy to become astronger Iberian and global player.

Clearwater International identified thetarget - located in Burgos, Spain - which isinvolved in the commercialisation ofchemical products in a variety of sectors.

Repsol

Leading international energy and chemicalsmanufacturer Repsol has signed atechnology transfer agreement with theChinese group Jilin Shenhua, granting Jilin alicense for the technology and basicengineering to build three plants in theprovince of Jilin in North East China. Oneplant will be for the manufacture of flexiblepolyols with a capacity of 185,000 tonnesper year, while the other plants will be forpolymeric polyols with a capacity of24,000 tonnes per year each.

Repsol is a global leader in the productionof polyols, which are alcohols containingmultiple hydroxyl groups and which are oneof the main raw materials used inpolyurethane manufacture. This versatilematerial is mainly used in mattresses,furnishings, decoration, automobiles andconstruction. Repsol, which is present inmore than 50 countries, produces andmarkets a wide range of products frombasic petrochemical derivatives.

Clearwater International advised Repsol on the transaction.

Clearwater International has had a busy startto the year in the chemicals sector.

Deals digest


CEPSA

Spanish industrial group CEPSA hascompleted the capital restructuring of itsinvestment in China, while also expandingits presence in the country in order toproduce cumene. InterChina acted asCEPSA’s advisor in both transactions.

CEPSA is an integrated energy companyoperating at every stage of the oil valuechain, with more than 11,000 employees.It is engaged in petroleum and natural gasexploration and production activities;refining; the transport and sale of crude oil derivatives; petrochemicals; gas; andelectricity.

CEPSA has grown to become Spain’s fourthlargest industrial group in terms ofturnover, and also has activities in Algeria,Brazil, Canada, Colombia, Panama, Peru and Portugal.

CEPSA conducted its first Chinainvestment in 2011 to produce phenol andacetone at the Shanghai Chemical IndustryPark. It has now further expanded itsChinese operations through an investmentproject to produce cumene, with a goal ofachieving 360,000 tonnes a year.


US trade buyers are increasingly looking overseas toaccess new markets and technologies.

Trade returns 5feature

“The trade buyer is much more prevalent and isdefinitely back with a vengeance. They’re nowcompeting head-on with PE again.”Darren Warburton, Squire Patton Boggs

In the wake of the global downturn, UScorporates were happy to play it safe,stockpile cash, pay down debt and sit tightfor the recovery. Fast forward to today, andwith the after-effects of the crash finallyfading, they’re getting into their stride again.

For the last few years, PE has retained anappetite for the right deals. As DarrenWarburton, partner and co-chair of thechemicals group at law firm Squire Patton

with a vengeance. They’re now competinghead-on with PE again.”

Much of the new-found appetite for M&Aamong US corporates is being driven bythe strength of debt markets. Leadingbanks are now aggressively targetingbusinesses across the spectrum.Warburton says lending isn’t just confinedto the bigger corporates.

Boggs, remarks: “It was only going to be solong before shareholders in the US startedto get across to companies that stockpiledcash or reduced borrowing should be usedas a platform for strategic acquisitions. USPE houses don’t like sitting on cash for anylength of time, and a few years ago theywere leading the pack on acquisitionactivity. However, now the trade buyer ismuch more prevalent and is definitely back

“Banks and debt providers are actively

targeting small- to mid-sized businesses

too. Much of this goes back to the fact

that the corporates who have lived through

the downturn may have now successfully

paid down their debt, which makes them

an attractive proposition from a balance

sheet perspective and encourages a more

ambitious M&A approach.”

If you specifically take the chemicalssector, where are US corporates lookingright now? Warburton says US companiesnever really stopped looking during thedownturn. “Asia, for example, didn’t havethe downturn that we had in the West,meaning that growth remained prettystrong throughout the period which is anappealing environment for acquirers.”

The trend is backed up by a recent surveyfrom Squire Patton Boggs andMergerMarket which found that in2012/13 the Asia-Pacific region overtookNorth America as the largest target marketfor chemicals deals in terms of volume,with a 29% share compared to NorthAmerica’s 24%.

On the march

2014 has already seen a string ofacquisitions across the world by US chemicalplayers, as they seek to expand their globalfootprint and access new markets.

For instance, the year began with AkzoNobel’s disposal of its primary amideschemicals business in South Korea, to thePMC Group. The deal adds to PMC’sportfolio of specialty chemicals derived fromrenewable oleo chemicals and complementsits leading global position in polymeradditives, while also providing a strongmanufacturing location in Asia.

Akzo says its focus is now on extending itsleading market position in organicperoxides and metal alkyls, as evidenced by

its own recent expansion investments inChina, the US and Mexico.

Another major deal saw PPG Industriesacquire Comex, a Mexican paint and coatingsmanufacturer, for a reported ¤1.7bn. Comexhas a number of leading, well-recognisedregional brands. The deal is verycomplementary to PPG as it adds a leadingarchitectural coatings business in Mexico andCentral America, a region where it had anegligible presence in that specific sector.

Staying in Latin America, Archer DanielsMidland agreed to sell its fertiliser distributionbusinesses in Brazil and Paraguay to theMosaic Company for ¤260m. The dealincludes four blending and warehousingfacilities in Brazil, one in Paraguay and awarehousing and logistics service facility.


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US acquirer Target Target country Target business

US acquisitions abroad 2014 (selected)

PMC Group

Monsanto

PPG Industries

Ecolab

ICM

Mosaic Company

Ampacet

Drew Marine

PPG Industries

Aquatrols

ScentAir Technologies

Stepan

Akzo Nobel primary amides business

Novozymes Bio

Canal Supplies

AK Kraus & Hiller

Amber Chemical

Archer Daniels Midland

Allied Color & Additives

Chemring Defence Germany

Comex

Farmura

Escential

Proctor & Gamble sulphonation facility

South Korea

Denmark

Panama

Germany

UK

Brazil/Paraguay

Australia

Germany

Mexico

UK

UK

Brazil

Primary amides chemicals

Bioagricultural solutions

Protective and marine coatings

Pest elimination services

Silicones chemical manufacturer

Fertiliser wholesaler

Colour masterbatchmanufacturer

Pyrotechnics manufacturer

Paint manufacturer

Fertiliser manufacturer

Scent fragrance oils

Sulphonation production

For Mosaic, the deal provides a criticaldistribution platform in one of the world’sfastest growing agricultural regions andcomplements other recent strategicinitiatives, including a joint venture inSaudi Arabia and its recent acquisition ofCF Industries’ phosphate business.

Europe, and especially the UK, remainsa strong focus of US activity. Aquatrolsacquired fertiliser manufacturerFarmura, while ScentAir Technologiesacquired Escential, a scent fragranceoils manufacturer. The latter deal,coupled with ScentAir’s recentacquisition of Swiss scent marketingcompany Bourdier Diffusion, helpsScentAir strengthen its servicecapabilities throughout the UK, theNordic countries and northern Europe.

Elsewhere in Europe: Ecolab acquiredAK Kraus & Hiller, a German commercialpest elimination services provider, in adeal which helps Ecolab expand itsEuropean footprint; while Drew Marineacquired pyrotechnics manufacturerChemring Defence Germany from theChemring Group.

Despite the lack of growth in Europeaneconomies in recent years, Europe isset to remain a key market for M&Aactivity due to more mature dealenvironments, stable end-usermarkets, efficient distribution channelsand innovation, says Warburton.

He makes the wider point that it canbe hard to classify a deal as simply, forexample, a US buyer acquiring aEuropean or Asia-Pacific target.“Invariably most deals are part of aglobal strategy and targets willordinarily have multiple operations inEurope, the Americas and Asia."

Shale impact

Another driver behind increased UScorporate confidence in the industry is theimpact of the shale gas boom which hasfundamentally improved the financialdynamics for a number of sectors includingpetrochemicals, with cost-savings freeingup capital to invest elsewhere.

As Warburton adds: “Many companies inthe US are re-starting or building newfacilities to take advantage of the energysupply conditions. The US has now becomehugely more competitive than other partsof the world. European companies are at animmediate competitive disadvantage.Many observers are asking the question‘how and when will we do shale gas?’’ andnot ‘will we?’.”

The view is echoed by Guy Zaczepinski, apartner at California-based PE house Century

Park Capital Partners which acquired UK-based Amber Chemical via its ICM Groupplatform earlier this year (see page 8). Headds: “With the shale revolution, the US looksset to benefit. There has been a tectonic shiftand the US could end up re-shoring a lot ofmanufacturing industry, because of the costadvantage. If you specifically take thechemicals industry the US is now effectivelya low-cost region.”

However, in terms of the wider economicrevival, Zaczepinski does strike a note ofcaution if debt markets get too lively. “Inthe US, the debt market is definitelygetting more frothy. Debt markets andlenders are getting more aggressive.Although commercial banks have pulledback a little because of uncertainty overforthcoming regulation, there are a bunchof other capital players coming into themarket who are happy to fill the space.”


7feature

“In the US, the debt market is definitely getting more frothy.Debt markets and lenders are getting more aggressive.”Guy Zaczepinski, Century Park Capital Partners


8profile

ICM’s acquisition of Amber Chemical earlier this year hasgiven the US business the global footprint it was looking for.

Golden deal

If you want a good example of how globalforces are increasingly driving the chemicalindustry, then look no further than thegrowth of Amber Chemical.

The company, which manufacturesspeciality silicones and has a portfolioranging from adhesives and sealants tocoatings, emulsions, greases, lubricants,and silicone fluids and foams, has built up a

competitors are small regional or nationalplayers, whereas Amber is probably theonly true global speciality silicone producer.Even in the US, there are a huge number ofsmall players but no global specialists.Clients like the fact that the business isglobal, as it de-risks contracts. They knowthat if there is a problem at one particularplant, then Amber can turn to anotherplant if required and it gives them security.”

However, a few years ago Caledonia took astrategic decision to focus its PE activities onlarger businesses and began sounding out asale with the help of Clearwater International.

Roeser, who had been CEO of Amber since2006, adds that the rather unpredictablenature of the business probably didn’t alignwith an investor looking for steady returns.“During the recession, the company didbecome quite an unpredictable businessbecause of the fluctuations in demand thatwe saw. But because of its global footprint,and its ability to be very flexible, Amber wasable to cope. This is a great business thatthrows off cash and Caledonia probablythought it was a good time to sell.”

Caledonia had interest from a number oftrade buyers, including enquiries from anumber of Asian bidders. Lewis echoesRoeser’s comments on the strengths of thebusiness: “Amber is one of the fewbusinesses of any real scale in its sectorand it was this scale that was the primaryattraction to potential purchasers. We hadnot stifled the development of thebusiness but we knew that the companywould benefit from a shareholder thatmight be prepared to be, shall we say,more aggressive in developing the business and which could look to makebolt-on acquisitions.”

One of those interested parties was the US-based ICM Group, a manufacturer of siliconedefoamers, emulsions and polymers for theautomotive, coatings, food processing,industrial and personal care markets.

The company was itself going through achange of ownership after being acquired in2012 by Century Park Capital Partners, aLos Angeles-based PE firm. Having beddeddown a new management team, the timingwas perfect for Century Park - which was

“Amber is one of the few businesses of any real scale inits sector and it was this scale that was the primaryattraction to potential purchasers.”Tim Lewis, Caledonia Investments

global presence in response to thedemands of its blue-chip clients. Servingcompanies in the aerospace, automotive,chemicals processing, electronics, foodprocessing, personal care and watertreatment sectors, Amber operates plantsin the UK, Italy, China and the US.

As former Chief Executive Joachim Roesercomments, one of the big USPs of Amberis that it doesn’t have a lot of competitionin the silicones market. “The majority of

Until earlier this year Amber was owned byCaledonia Investments, the listedinvestment trust, which had held thebusiness for the best part of 50 years. AsTim Lewis, Associate Director at Caledonia,explains: “We invest for the long-term andhave no time constraints, so can end upowning companies for a long time. For onereason or another, Amber had continued tosit within the group and there was neverany thought of selling it.”


9profile

now looking to develop a buy-and-buildstrategy, and had brought in formerHuntsmann Corporation COO DonStanutz as Executive Chairman of ICM tooversee the drive.

As Roeser adds: “ICM had firstapproached us back in 2012 as it waskeen to get into the speciality siliconesmarket. Initially they had asked us if wewould be prepared to sell just our USplants, but Caledonia didn’t want to selljust one part of the business as a big partof our attraction was having this globalreach. Then they came back wanting thewhole company.

“A business like Amber brings hugeopportunities for a player like ICM, whichcan tap into Amber’s productdevelopment in speciality siliconecompounds, while allowing ICM to climbthe value chain and broaden its portfolioin order to fulfil its global ambitions in thesilicones market.”

Guy Zaczepinski, Partner at Century Park,says Amber was a “very synergistic deal”for ICM and gives it a global footprint. He adds: “Once Amber is fully integrated,we will look for other emulsion andelastomer add-ons in the US, Asia andEurope, and will continue expanding ourinternational presence.”

Zaczepinski says there are manyniche players in the market to consider: “It is a matter of having the stars alignedand getting to these businesses at theright time. Our intention is to stay withinthe silicone vertical market, as there areenough businesses which we can boltonto our platform. ICM will remain a pure play company, which we believe willmake it a more valuable asset furtherdown the track.”

One of the key markets which Amber will continue to serve is the automotivesector where it is a particular specialist insealing the electronic parts of vehicles.Other key target markets includerenewable energy, as Amber makesproducts for wind turbines, and sealants for engine parts used in theaerospace industry.

Silicone is resistant to extremely hightemperatures and is also an excellentshock absorber, which makes it a perfectproduct in vehicles. The average carcomprises of around 35kg of silicone, andgiven that cars typically now have smallerhigh-performance engines which gethotter than old engines, silicone hasbecome increasingly popular for carmanufacturers.

Amber also increasingly works directlywith automotive manufacturers on nextgeneration products and productdevelopment. As Roeser, who has leftAmber following the sale, adds: “A lot ofcompanies have come out of productdevelopment since the global recession,preferring to outsource that element,which has been to the benefit of a playerlike Amber. Product development is agreat opportunity for the business underits new owners.”

Reflecting on the deal, Constantine Biller,Global Head of Industrials & Chemicals atClearwater International, says its chemicalsteam's extensive knowledge of the globalsilicones market meant it was able to offeran insight into how market developmentswere impacting on M&A activity. “It isthrough this dedicated, sector-focusedapproach that we can position specialitychemicals companies for sale and enhanceshareholder value. Amber is a greatbusiness with superb global reach.”


10interview

Chemicals turnaround specialist Mike Polkinghornshares his top tips for success.

Change driver

When did you first get involved in aturnaround?

I was first recruited by Sherwin- Williams in2004, with a specific remit of turningaround their Ronseal Operations woodcoatings business. Historically, Ronseal hada strong ‘front of house’ but their engineroom was performing well belowexpectations. Over a two year period we

Tell us more about the importance ofthese KPIs?

They really are your dashboard for change.Just like a car dashboard shows you keyperformance data like speed and distance,an effective suite of KPIs need to be highlyvisible, have strong alignment to overallstrategy, and drive the right behavioursthroughout all levels of the business.

set about a root and branch turnaround,changed the operations management teamand started implementation of practicallean initiatives that have a proven trackrecord of delivering results. I analysed thecomplete end-to-end supply chain andidentified how it was performing againstnew key performance indicators (KPIs) onsafety, quality, customer service and cost.

A fundamental success factor to thisapproach is that every KPI needs to betightly linked to a series of active plans andinitiatives which relentlessly drive eachindicator in the right direction.

Many managers will start out with a good setof ‘window dressing’ KPIs, but they do notachieve people alignment or linkage to newways of working. If the necessary engine for

turnaround is not in place, the indicators justbecome a simple tracking system. Using thecar analogy, it’s a bit like having a dashboardbut no engine or wheels.

You later worked for Crown Paints,which is viewed as one of the mostsuccessful turnarounds of recentyears. Tell us more.

I was involved in the Sherwin-Williams duediligence team which looked at CrownPaints when it came up for sale in 2008.The European Competition Commissionapproved Akzo Nobel’s acquisition of Dulux(ICI), on the condition it sold the CrownPaints business as part of this takeover.

Akzo had struggled to make Crownprofitable and it was seen as something of a Cinderella low margin business. However, I could see in Crown Paints a mirror copy ofRonseal; there were a lot of similarities. The business needed focus, the rightmanagement team, and fundamentally newways of working with tightly managed KPIs.

When I later joined Crown, after its sale toPE house Endless, we did a lot of workrightsizing the business, simplifying themanagement structure, logistics andcustomer delivery, and took out a significant

“I could see in Crown Paints a mirror copy of Ronseal,there were a lot of similarities. The business neededfocus, the right management team, and fundamentallynew ways of working with tightly managed KPIs.”


amount of cost. We also had to disentanglethe IT system from Akzo Nobel, to bothimprove data security and protect IP.

What was the key to Crown’stransformation?

One of the most significant areas was inpurchasing. When I first arrived, thebusiness did not have a full strengthpurchasing team and much of the high valuepurchasing decisions were being madecentrally at Akzo Nobel HQ. There was alocal purchasing team, but it waspredominantly focused on low value itemsand the purchasing systems needed to bemore robust. I recruited a new purchasingdirector to tackle these key improvementareas. Typically, just under 50% of a finishedpaint cost is attributable to raw material andpackaging costs, so having an effectivepurchasing director on board wasfundamental to our success.

Just how tough is it working on such aturnaround?

Incredibly tough. In any turnaroundsituation, you have to immerse yourself24/7 in the business and you certainlydon’t achieve success just by sorting outyour KPIs. However, although the actualjourney at Crown was very difficult, whenyou get to the end and realise you havecreated a profitable and sustainablecoatings business, it gives you atremendous buzz and you gain terrificmotivation from that. Crown went frombeing loss making to being more than£20m in profit (EBITDA) in less than threeyears, while operational costs andefficiencies were improved by 20% acrossthe supply chain.

But measuring the success of anyturnaround is about more than justmeasuring its performance on the day you

leave. Ultimately, the organisation mustalways be greater than the individual andthe true test of a turnaround is whether thecompany can continue to grow with its newinfrastructure once you have gone. If itdoes, then it shows that the true potentialfor the business was there all along.

What key trends are you seeing in theglobal coatings industry today?

This remains a huge global industry, worth inthe region of nearly ¤88bn with almost athird of those sales in North and SouthAmerica and over a third in Asia-Pacific. Interms of decorative paint, we continue tosee a huge move away from solvent-basedproducts to water borne solutions - largelydriven by environmental legislation. But weare also seeing long-term changes in routesto market as demographics drive apreference for the professional paintcontractor over DIY. Companies with astrong trade route to market are well placedto take advantage of this trend.

I believe having a controlled distributionmodel involving end-to-end supply chainmanagement, where the paint manufacturerhas a strong paint store presence in themarket, is a key long-term success factor.The successful coatings players of tomorrowwill have core competencies in bothmanufacturing and retailing.

What about the M&A landscape?

If you take the paint industry, over the lastdecade we have seen a lot of consolidation,typified by deals such as PPG’s acquisition ofAkzo Nobel’s North American architecturalcoatings business and by The CarlyleGroup’s acquisition of DuPont PerformanceCoatings. Consolidation will continue to bedriven by the search for scale, as fixed costscan be reduced significantly across thewhole supply chain. However, despite this

11interview

Before his role as Group OperationsDirector for Crown Paints, which he left in 2011 following thecompany’s sale to Hempel,Polkinghorn was Vice-President ofOperations (Europe, Middle East &Africa) at Sherwin -Williams andspent several years prior to thatrunning its UK Ronseal division. Hehas also held roles at BaxterInternational, Akzo Nobel, GlaxoWellcome and Scottish & Newcastle.

CV

move to consolidate, the general paintindustry remains remarkably fragmentedwith more than 10,000 companiesoperating globally today.

Now that you have left Crown Paints,what are your own plans?

Because of my background as a trainedchemist, and having worked in a number ofindustries from brewing and pharma tocoatings, I can operate in most parts of thebroader chemical sector. More specifically,I’m looking for buy- in opportunities acrossthe UK and the rest of Europe that canprovide me with a suitable challenge overthe next five years or so.

12global New beginning


India’s new prime minister Narendra Modi has pledgedto transform the country’s economic fortunes. AshishBagadia from IMAP India assesses the likely impact forinvestors and M&A activity.

Since Narendra Modi’s election in late May,the change of mood in the Indian businesscommunity is palpable. The new primeminister has promised great things to makethe government more business-friendly tooutside investors, and so far the omens arevery good.

Before the election, all decision-makingwas at a standstill - as was internationalinvestment. The landscape was certainlyfar from business-friendly, with theprevious government making policydecisions which often sent out the wrongsignals to the financial community andstrategic investors, especially in areas like taxation.

By contrast, Modi is well-known for hisbusiness acumen and dealing with foreigninvestors. Now that he has anoverwhelming mandate following hislandslide victory, we are already seeinginvestment confidence starting to return.

What will his priorities be? Investment ininfrastructure is certainly a necessity, as istaxation. At the moment, there are multiplelevels of taxation across different states andthe lack of harmonisation restricts themovement of goods and services. Takingsteps to unify and streamline taxes will beextremely significant.

Another top priority will be to provide well-defined policy frameworks for landacquisitions and environmental clearance of projects.

The economic backdrop to Modi’s electionis mixed. Because of its domestic demandand the investment that continued to bemade in 2008 and 2009, India was hit bythe global slowdown much later than othercountries. Even by 2010/11, the economywas still growing at up to 8% a year andcompanies were still borrowing.

Unveiling his administration’s first budget in July, Modi’sgovernment vowed to reviveeconomic growth to 7-8 % within the next three years. The government also announcedplans to raise foreign investmentlimits in defence and insurance,and simplify its tax system. Thestate has also declared plans toopen up its railway network toforeign investors and create high-speed links between large cities.

13global


Today, the picture isn’t as healthy withgrowth rates falling to 4.7% in 2013.Businesses, particularly mid-sizedcompanies in sectors such asmanufacturing and engineering, arefocusing hard on the bottom line and whatefficiencies they can make. Those whichare heavily geared continue to face majorhurdles, while there is also a continued shiftaway from traditional manufacturingpractices towards more technologically-based businesses.

However, overall the prospects for theIndian economy remain very strong for anumber of reasons. Indian companiescontinue to have a significant costadvantage over their Westerncounterparts; many manufacturingindustries are still relatively immature andcontinuing to evolve, plus the hugedomestic demand won’t go away.

Language remains influential too, withEnglish-speaking manpower in sectors such as IT, engineering design andpharmaceuticals being particularlyimportant.

Against this backdrop, what are theprospects for M&A? Well, we stronglybelieve that if Modi continues to send outthe right signals then we are going to seeall-time high levels of M&A activity in India.We expect strong dealflow in sectors suchas infrastructure, engineering, automotive,pharma, IT and consumer-linked industries.

Our view is that people have been waitingfor this election and the change of guardbefore looking at deals again. There are alot of conversations going on right now.

A particular driver will be Indian companiesgoing to international markets to tap intocustomer relationships. We have alreadyseen this in the automotive components

The chemicals sector has not seen toomany large transactions over the last fewyears, but there has been activity in thepetrochemicals and fertilizer space.However, if - as we expect - theinvestment climate improves, we believethere is going to be major interest in thechemical space. For instance, the market forspeciality chemicals for plastics/polymers isalready of keen interest as the countryincreasingly adopts usage of plastics.

The last few months have seen someinteresting transactions. Clariant Chemicals, a world leader in specialitychemicals, acquired Plastichemix Industries, in a deal which enables Clariant to offer a wide range of products in India such as masterbatches,flushed pigments, mono-concentrates and engineering plastics compounds.

Another notable transaction saw Japaneseindustrial gas maker Air Water acquire amajority stake in Ellenbarrie IndustrialGases, which produces liquefied oxygen,nitrogen and argon gases.

Leading players in the Indian industrial gas sector include Linde, Praxair, AirProducts and Air Liquide. Like mostsegments of the chemical industry in India, the gas market is dominated byleading multinationals along with a fewIndian players.

For our team, putting effort into the rightplace in such a huge market remains thekey. By focusing on market leaders and thefastest growing companies as a strategy,we are well positioned to present the mostsuitable opportunities to investors.

“We strongly believe that if Modi continues to sendout the right signals, then we are going to see all-time high levels of M&A activity in India.”Ashish Bagadia, IMAP India

industry, where Indian players have made acquisitions overseas in order toaccess OEM relationships. Another factor iscompanies wanting to access specifictechnologies or product capabilities, whilemany businesses will continue to cater toglobal demand for the offshore model.

While acquisition financing is expensive inIndia, we are witnessing interest fromglobal funds as well as banks to provideoffshore acquisition funding throughvarious structures to Indian companieswith sound transaction rationale.

14PE focus

As part of our regular look at the PE industry, we speak toMatt Lyons from Vespa Capital.

PE focus


Tell us a little about the backgroundto Vespa?

Vespa was founded in 2008 and four of itsfive senior team members today, includingmyself, came from Montagu Private Equitywhere we focused on spin-outs from bigcompanies and private company buyouts.We are now applying that whole thinkingand approach to investment towardssmaller-sized deals. We have been workingtogether as a team for between 10 and 15years, and at Vespa we are the largest fundinvestor collectively which brings a veryclear alignment between ourselves, ourfund investors and our management teams.

Are there particular types of dealsthat you focus on?

We have a real focus on what we term‘private company recapitalisations’, namelyproviding a solution for either an individualshareholder or a group of individuals who,for whatever reason, need to move theirshareholding along. From both a personaland financial perspective, it is often betteras a shareholder to do that in a series oftransactions over time. Virtually all ofVespa’s transactions have had an element ofus buying a company, but then the vendorsrolling over part of their stake into ourstructure to some greater or lesser extent.

How do you get in front of thesesmall companies?

Finding the right company within the rightsector at the right time is the holy grail,and it is about getting into that businessand capitalising on its solid revenuestreams and loyal customer base.

The challenges you face in each companycan be very different. You are confrontedby a very specific set of products andmarkets, and you need to get your mindaround that in an efficient way. There isalways a balance between understandingsufficient detail but not getting lost in it. It is about being very clear about what you can deliver.

What do you term as smaller-sizeddeals?

We typically focus on deals in the ¤13-¤63m enterprise value range. At the lowerend of the spectrum, we tend to find thereis less competition and yet a lot of privatecompanies fit into this bracket - particularlyin sectors such as chemicals. We would alsoargue that there are not many PE firmswhich have the depth of experience thatwe have in this price range, especially interms of our international outlook and ourextensive experience of cross-border deals.

Such a global viewpoint must beuseful in the chemicals industry?

It’s particularly relevant and we are keen todo deals in the sector. A lot of chemicalproducts are now sourced globally andhave a significant international element tothem. If you are trying to sell a ¤25mchemical company to a trade buyer,however, you will often be regarded as fartoo small and that’s where we can come in.We also see good opportunities as largerindustry players continue to reshape theirportfolios, particularly towards emergingmarkets such as Asia.

As such, they are often keen to free up theirbalance sheets by selling a few non-corebusinesses. Again, an issue is thatsometimes these subsidiaries are consideredso small that they may be seen as not worthdivesting. Many chemical corporates haveincreasingly got a minimum threshold interms of the size of deal they will look at.

How do you view the market at themoment?

Corporates see the world as relativelystable, but do not perceive a massiveupturn in the immediate future. If you aregoing to do a deal, then doing it in thisenvironment is sensible.

ICM Products

Manufacturer of speciality siliconesfor a wide range of niche markets

Clearwater International advisedCaledonia Investments on the sale toICM Products

Amber Chemical

Cofarcas

Chemical distribution companypresent in Iberia and Africa

Clearwater International advised onthe acquisition of Cofarcas, aSpanish chemicals distributor

Quimitecnica.com

Jilin Shenhua Group

Leading international energy andchemicals manufacturer

Clearwater International advised onthe technology transfer transaction

Repsol

Bunzl

Leading player in the cleaning andcleaning supplies marketplace

Clearwater International advised onthe sale

Clean Care

ASC Companies Inc

Manufacturer of process equipmentand associated chemicals forselective electroplating applications

Clearwater International advised onthe acquisition of ASC Companies Incfrom SIFCO Industries Inc

Norman Hay

Cumene plant assets

Supplier of mid-stream chemicals,manufacturer of raw materials

Clearwater International representedthe buyer on the transaction

CEPSA

FMC Corporation

Leading supplier of natural foodcolours

Clearwater International secured the sale of Phytone to a US chemicals giant

Phytone

Shandong Tianbao Chemical Industry

Provider of key raw materials for thenitro chemical industry

Clearwater International advisedMaxam on acquiring majority controlof the company

Maxam Group

Polaris Management

Supplier of novel soya proteinproducts

Clearwater International advised onthe sale of Hamlet Protein by OKBiotech ApS and SPR Holding

Hamlet Protein

15deals


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