HOUSTON—For decades emulsion styrene-butadiene rubber was a typical commodity business, suffering from overcapacity, a declining growth rate and pricing pressure from foreign sources.
SBR suppliers couldn´t leave the industry fast enough.
So what has lured the hot new investor in the chemical business to buy SBR producer DSM Copolymer Inc.? Two words: Change and potential.
"The industry has changed a lot since the exit of Goodyear (from the merchant SBR business)," said Peter W. de Leeuw, managing director of Lion Chemical Capital L.L.C., the private equity company that has agreed to buy the business from DSM N.V. "There´s really only ISP (Elastomers) and Copolymer left to handle things."
De Leeuw—a 30-year veteran of the elastomer industry who ran Shell Chemical Co.´s Kraton thermoplastic elastomer business for many years—knows all about the problems emulsion SBR producers have faced. "My original memory of emulsion SBR is it wasn´t a stellar business. But if you look at the fundamentals, it could be a nice business to be in."
The deal, expected to close soon, is the second acquisition by Lion Chemical. In 2004 the firm bought PolyOne Corp.´s compounding and additives business and renamed it Excel Polymers L.L.C.
The latest purchase will give Lion Chemical one of the original SBR facilities, in Baton Rouge, La. De Leeuw said DSM Copolymer fits the profile of the type of businesses the firm seeks—undervalued assets that can be the low-cost producer, show operational improvement and strategic enhancement.
"In a tough industry, Copolymer is perhaps the class of the business," he said. "We know what needs to be done to make it the premier company. I´m very confident we can make it a first-rate company, one of the best SBR companies in the world," he said.
The Baton Rouge operation has seen a succession of owners during its long history. "The owners in many cases had lots of other businesses, and SBR was a stepchild," de Leeuw said. Now, as a stand-alone business focusing only on SBR, Copolymer will have a big advantage from the past, he said. "Decisions will be made quickly, not like at a big company where it isn´t the core business, but is the last one on the totem pole."
DSM bought the business for $242.5 million in 1989, which included an EPDM plant in Addis, La. Since then, the Dutch company has closed the Addis facility and another EPDM factory in Japan, and has changed its focus to life science products and performance materials.
Although the completion of the sale—worth about $50 million, including liabilities—hasn´t occurred yet, de Leeuw said improvement plans are afoot.
"We´re going to make a few changes, but they will be very dramatic as far as the expectation level," he said, speaking from his office in Houston. The company will emphasize safety and reliability, and in 2006 will expand annual production capacity by about 12 percent to 380 million pounds, without a shutdown.
De Leeuw has spoken with many of the DSM Copolymer employees. "I told them the business plan is that to make money in a downturn, you´ve got to stay positive, and make good money when the business is good. Then you have the cash to invest back into the business."
Feedstock shortages can have an impact on rubber production, but de Leeuw isn´t worried about that. "We have our (butadiene) supplier, Exxon, right next door. We´ll be able to get feedstock to run the plant."
De Leeuw said companies he´s been associated with always emphasize safety, and he expects the Baton Rouge facility to be in the top 10 percentile in that category. "Safety is a barometer of management attention and expectations," he said.
De Leeuw called DSM a first-class outfit, with the highest ethics when it came to negotiations. "No games were played. We had tough negotiations, went head-to-head for six months, but I have respect for those people."
The SBR company´s name will be changed. "We´re definitely going to keep ´Copolymer.´ It´s a pretty good name, very well recognized," de Leeuw said. He hopes to name a new head of the operation soon after closing.
Lion Chemical has stated the SBR business will be run independently from Excel, but that hasn´t reassured some custom compounders. They´ve complained—off the record—that the deal will put them at a big disadvantage, since one company will own the nation´s largest compounder plus a major SBR supplier that also produces masterbatch. De Leeuw doesn´t agree.
"SBR is one of the lowest percentage products we use for compounding at Excel," he said. "Good compounders don´t have anything to worry about." Down the road de Leeuw hopes the two operations can find ways to share some routine administrative costs, but that´s not a priority.
De Leeuw said the purchase differs from the Excel deal in that Lion Chemical has a 50-percent partner, ACI Capital Co., in that venture. He said cash flow from Copolymer will go to repay debt and reinvest in the business, rather than pay dividends to the investors.
Lion Chemical will continue to pursue other acquisitions. "We hope to do one or two deals a year," de Leeuw said. "We´re really small in the private equity game. We can´t work on more than one at a time."
He said the company tried to buy the Goodyear Wingtack adhesives resin business, which instead was sold to Total S.A.´s Sartomer Co. for about $65 million.