Comments from Gaskins about Hexion (HXN):
A dull, over leveraged company
-- with a gross profit less than Amazon’s;
-- being run for the benefit of a leveraged buy out firm, which has been raiding the balance sheet;
-- has squeezed about as much life out of the balance sheet as possible;
-- and is now turning to the public markets for more money for shareholders.
Financial analysis comments:
-- Notice that in the March quarter the company’s interest payments were 60% more than profits, that’s a clear definition of high and potentially dangerous leverage.
-- Also notice the use of proceeds. This is a classic bailout, especially after they borrowed about a year ago to pay themselves (shareholders) a $550 million dividend!
Use of proceeds $87mm in IPO proceeds from 3.8mm shares
(in the aggregate, the selling shareholders will receive $383 million of net IPO proceeds from sale of 15.2mm shares))
. 100% of IPO proceeds to HXN plus available cash to repay $100mm of a term loan
under new senior secured credit facilities
. On May 31, 2005, HXN used all of the proceeds that received from an offering of shares
of Series A Preferred Stock and a portion of the proceeds from borrowings under a May
2005 senior secured credit facilities to declare a special dividend of $550 million (of which
$27 million remains to be paid) to the parent, Hexion LLC, which in turn paid a pro rata
special dividend to its equity holders, which included Apollo and other investors, including
certain members of the management.
And then there’s the issue of the Akzo recent acquisition which had $215 mm in sales in 2005, and whose numbers are not reflected in the March quarter proforma – quite unusual.
Recent $215mm in annual sales acquisition not reflected in proforma figures
. "Except as may otherwise be noted in this prospectus, all financial and other data for the three months ended and as of March 31, 2006 gives effect to the Rhodia Acquisition and the Rohm and Haas Acquisition from the respective dates of acquisition, but does not give effect to the Akzo Acquisition which was completed during the second quarter.""
The Akzo acquisition
. "On June 1, 2006, we acquired the global ink and adhesive resins business of Akzo Nobel (the "Akzo Acquisition"). The business produces resins used to manufacture inks for commercial printing and packaging, digital inks for laser and photocopying printing, and pressure sensitive adhesives used in tape and labeling applications.
. "The business generated 2005 sales of approximately $215 million, and includes 10 manufacturing facilities in Europe, North America, Argentina, Asia and New Zealand. The acquisition was funded through a combination of available cash and existing credit lines.
Business
. HXN is the world’s largest producer of thermosetting resins, or thermosets.
. Thermosets are a critical ingredient for virtually all paints, coatings, glues and other
adhesives produced for consumer or industrial uses.
. HXN is focused on providing a broad array of thermosets and associated technologies,
with leading market positions in all key markets served.
Global market & conditions
. The total global thermoset resins market is $34 billion in annual sales, of which HXN’s primary markets represent $19 billion in annual sales.
. HXN’s results are impacted by the effect on customers of economic upturns or
downturns, as well as the impact on HXN’s costs to produce, sell and deliver products.
Customers use most of HXN’s products in their production processes; therefore, factors
impacting their industries could significantly affect HXN results.
. Major industry sectors served by HXN include industrial/marine, construction,
consumer/durable goods, automotive, electronics, architectural, civil engineering,
repair/remodeling, graphic arts and oil and gas field support.
. Key drivers for HXN’s business are general economic and industrial growth, housing
starts, auto builds, furniture demand, active gas drilling rigs, print advertising demand and
chemical intermediates sector operating conditions.
Recent industry trends
. After a relatively flat demand for epoxy resins in 2002 and 2003, demand for HXN’s
epoxy resins in 2004 increased significantly and demand through 2005 was strong.
. Similarly, the pricing environment for HXN’s epoxy resins was positively impacted by
increased demand and lack of availability of raw materials in some segments of the
market.
Geographic sales distribution
In 2005, 58% of HXN’s forma net sales were derived from sales to North America,
32% to Western Europe and 10% to Asia-Pacific, Latin America, Eastern Europe and
other emerging markets
History
The Combinations.
. On May 31, 2005, Resolution Performance and Resolution Specialty were combined
with and into Borden Chemical (the "Combinations"), all of which were controlled by
leveraged buy-out firm Apollo Management, L.P. and its affiliates ("Apollo").
. As of December 31, 2004, Apollo and its affiliated funds held approximately 98%, 72%
and 95% of the then outstanding capital stock of Borden Chemical, Resolution
Performance and Resolution Specialty, respectively. In connection with the
Combinations, the minority interests in Resolution Performance and Resolution Specialty
were eliminated.
. Upon the consummation of the Combinations, Borden Chemical changed its name to
Hexion Specialty Chemicals, Inc. and BHI Acquisition LLC, Borden Chemical’s parent,
changed its name to Hexion LLC. Immediately following completion of this offering,
Apollo, through Hexion LLC, will hold approximately 70.5% of the outstanding common
stock of Hexion.
The Borden Transaction.
On August 12, 2004, an affiliate of Apollo acquired all of the outstanding capital stock of
Borden Chemical (the "Borden Acquisition").
The Resolution Performance Transaction.
On November 14, 2000, an affiliate of Apollo acquired control of Resolution Performance
in a recapitalization transaction (the "Resolution Performance Transaction"). Prior to the
recapitalization, Resolution Performance was a wholly owned subsidiary of the Royal
Dutch/Shell Group of Companies ("Shell").
The Resolution Specialty Transaction.
On August 2, 2004, Resolution Specialty, an affiliate of Apollo, acquired the resins, inks
and monomers division (the "Resolution Specialty Acquisition") of Eastman Chemical
Company ("Eastman").
The Bakelite Transaction.
On April 29, 2005, a subsidiary of Borden Chemical acquired Bakelite (the "Bakelite
Acquisition"). Upon the consummation of the Bakelite Acquisition, Bakelite became an
indirect, wholly-owned subsidiary of Hexion Specialty Chemicals Canada, Inc. ("Hexion
Canada").
Competition
Adhesive & Structural Products and Market Application
Major Products & Principal Competitors
. Forest Products Resins: Dynea International, Georgia-Pacific and Kronospan
. Specialty Phenolic Resins: Dynea International, Occidental Petroleum, Schenectady,
Ashland and PA Resins
. Formaldehyde Applications: Dynea International and Georgia-Pacific
. Epoxy Resins and Intermediates: Huntsman, Dow Chemical, Nan Ya and the Formosa
Plastics Group, Chang Chun Polymers and Thai Epoxy
. Composite Resins Huntsman, Dow Chemical, Ashland, AOC, Reichhold and
CCP/Atofina
Phenolic Encapsulated Substrates: Ashland, Carbo Ceramics, Santrol and Dynea
International
. Molding Compounds: Dynea International, FAR and Sumitomo
Coating Products and Market Application
Major Products & Principal Competitors
. Epoxy Coating Resins: Dow Chemical, Huntsman, Nan Ya and the Formosa Plastics
Group, Leuna and Kuk-do
. Polyester Resins: DSM, Cytec, Cray Valley/CCP, Reichhold, Nuplex and EPS (owned
by Valspar)
. Alkyd Resins: Reichhold, CCP/Atofina/Cray Valley, DSM, Nuplex and EPS (owned by
Valspar)
. Acrylic Resins: Rohm & Haas, BASF, Dow Chemical, Cognis and DSM (Neoresins)
Ink Resins and Additives: Mead Westvaco, Akzo Nobel, Arizona, Resinall, Arakawa and
Harima
. Versatic Acids and Derivatives: ExxonMobil and Tianjin Shield
Use of proceeds $87mm in IPO proceeds from 3.8mm shares
(in the aggregate, the selling shareholder will receive $383 million of net IPO proceeds
from sale of 15.2mm shares))
. 100% of IPO proceeds to HXN plus available cash to repay $100mm of a term loan
under new senior secured credit facilities
. On May 31, 2005, HXN used all of the proceeds that received from an offering of shares
of Series A Preferred Stock and a portion of the proceeds from borrowings under a May
2005 senior secured credit facilities to declare a special dividend of $550 million (of which
$27 million remains to be paid) to the parent, Hexion LLC, which in turn paid a pro rata
special dividend to its equity holders, which included Apollo and other investors, including
certain members of the management.