CVC, KKR among firms eyeing Orica chemicals unit

HONG KONG Fri May 30, 2008 4:58am EDT

HONG KONG (Reuters) - Private equity firms are pursuing a bid for Orica's (ORI.AX) Chemnet, sources involved with the auction said on Friday, as the Australian explosives maker looks to sell the chemicals trader, which could be worth more than A$600 million ($574 million).

Goldman Sachs (GS.N) is running the sale of the division, with CVC Capital Partners and Kohlberg Kravis Roberts & Co KKR.UL among the firms with the strongest interest, the sources said.

Chemnet, Australasia's leading chemicals trading business, sells chemicals to a range of industries, including the food and drink, pharmaceuticals and construction sectors.

Prospective bidders are viewing key financial data about Chemnet, one source said, with first-round bids expected in the next few weeks. One source said a private equity bidder could team up with a strategic buyer to purchase Chemnet.

Orica and Goldman declined to comment.

Private equity firms, which typically buy companies with borrowed money and sell them later, are attracted to units being divested because they are usually easier to turn around. With a renewed focus on the "non-core" business, buyout firms usually seek to change management, cut costs and streamline the units.

Buyout firms also tend to focus on a company's earnings before interest, taxes, depreciation and amortization -- a measure of cash flow known as EBITDA -- because they need the cash to pay back loans.

Chemnet posted A$40.6 million EBITDA in the six months to end-March, but it was the least profitable of Orica's five divisions during that period, making 16 percent of its A$5 billion sales but only 7.7 percent of its A$528 million EBITDA.

Although Chemnet's EBITDA grew at a healthy 12.5 percent from a year earlier, it grew more slowly than the other businesses.

GEARING DOWN

Selling Chemnet would raise cash for Orica, which is looking to expand in Indonesia, Latin America and Australia.

It is also aiming this year to cut its gearing and maintain a BBB+ credit rating after last year's $670 million acquisition of Excel Mining Systems LLC from U.S private equity firm Snow Phipps Group LLC. A sale of Chemnet could offset that investment.

Macquarie has said Chemnet is worth A$723 million, according to the Australian Financial Review, which first reported that Orica was looking to sell.

According to another source involved with Chemnet, CVC last year paid 11 times trailing (previous year) EBITDA for Univar, a U.S.-based chemicals distributor.

BC Partners, another possible private equity bidder for Chemnet, in July 2006 agreed to pay around 8.6 times trailing EBITDA for Germany's Brenntag, also a chemical distributor, the source said.

Analysts at UBS wrote in a client note this month that asset-light companies in the sector had performed better than their asset-heavy peers over the last five years, and Orica had moved towards the former camp by selling capital intensive chemicals units and buying asset-light businesses such as Excel.

"We see this theme continuing for Orica as it ponders divestment of its non-mining related chemicals businesses and redeploys capital into lower capital intensity businesses," UBS said.

At least four other private equity firms have taken a close look at Chemnet.

Last year, Bain Capital, Blackstone Group (BX.N), Pacific Equity Partners and Morgan Stanley (MS.N) Principal Investments offered A$32 a share for all of Orica. Orica rejected the offer. The shares closed at A$30.3 on Friday.

Melbourne-based Orica first began selling explosives to gold miners in the 19th century and has thrived in the last year amid a mining boom. It is also Australia's largest paint and chemicals supplier.

(Additional reporting by Sonali Paul in MELBOURNE)

(Editing by Ken Wills & Ian Geoghegan)

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