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| To another level - After a private equity buyout huge by Hungarian standards. Interview with Dr. Thomas Jetter |
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Over the course of the last nine months, Permira Funds, a leading global private equity specialist, has been engaged in the buyout of Hungary's leading blue-chip chemicals and plastics producer, BorsodChem Nyrt for a headline value of ~$850 million. As of December 2006, Permira and its transaction partner Vienna Capital Partners (VCP) Group, successfully completed the public purchase offer for BorsodChem, acquiring a joint holding of 92.9% in the company. Following this, Permira then made offers for the remaining share held by minority investors; the 100% buyout and subsequent de-listing of the company from the Budapest Stock Exchange Zrt (BÉT) looks set to be completed by March 26 Kazincbarcika-based BorsodChem is pushing on with a five-year, ~$500 million expansion, which aims to see the company become the number one producer of the polyurethane TDI in Europe, and to make the step from regional player to major European company and beyond. BBJ reporter Matthew Higginson spoke to Permira's chemical sector head Dr. Thomas Jetter to discuss the successful transaction, the increasing role of private equity firms in Europe's M&A landscape, and his hopes for BorsodChem. What follows is an edited transcript of their conversation.
Q: What was it that initially attracted Permira to BorsodChem?
A: We tend to look at deals from the business perspective first, and the clear pattern over the last 20 years shows us polyurethanes is the fastest growing plastics sector in the world. Within the last 10 years, BorsodChem (BC) has been able to position itself in an emerging role within this business, and with investments in 2000 and 2002 the company had already also executed a significant capex program, so overall I think it's an attractive market and an attractive company. It also has a good cost position at its Kazincbarcika plant with the dual use of the chlorine molecule, and we saw an opportunity with Kay Gugler as CEO to grow the business further and to take it to the next level. What we were able to do during the transaction process was to secure the financing of the next major expansion plans for the TDI and MDI businesses, and in simple terms our investment hypothesis is that in the future with those expansions we will have a company in the isocyanates sector of a very different scale to today. Yes, the company is already there in the international market but I believe we can make it even stronger.
Q: In a BBJ interview in June 2006, CEO Kay Gugler told us he had a vision of BC as first a major European player and second a global competitor. Do you share that vision?
A: Absolutely. Our plan is consistent with that, and with the experience of the last nine months I can simply say we are wholeheartedly committed to this vision.
Q: And that can be achieved with Mr. Gugler at the helm?
A: Yes, absolutely. After succeeding Mr. Kovács as CEO, it's very clear that Kay Gugler is a very strong business leader, brings a lot of experience to the table, and we value him as someone that is 100 percent capable of running such an international business. His international experience is invaluable, and I think he's therefore able to shape his Hungarian management team in such a way that they all believe the company has a great future. I also sense strongly that people like to work for Kay Gugler.
Q: Regarding the actual transaction, was it difficult to complete such a large-ticket deal in Hungary?
A: The enterprise value of the deal, i.e. equity plus debt, is over one billion Euros. So it was certainly a very large deal and I think only after two huge telecoms deals it's the largest private equity transaction in CEE to date. Regarding the actual process, I must say we were very impressed by the straightforwardness and the certainty of the legal process here. I think the legal system in Hungary has top class standards and also , and I must emphasize this , the support we received from the local regulatory authorities and the government really encouraged us to go through with the transaction and was incredibly helpful in making the process successful.
Q: And in comparison to other Permira transactions?
A: Again, yes it was very much straightforward. Firstly, we were able to very quickly secure 50% of the shares via options contracts, which provided an unusual degree of certainty in the transaction. Secondly, the public-to-private move has unfolded smoothly as well: There were no major holdups with the local authorities. Yes, they certainly wanted to review all the documents , this is their duty , but there was always very good cooperation. Secondly, fortunately we had no hedge fund activity around the company that could have blocked the deal. My hypothesis here is that there was no hedge fund activity because we have to deal in forints. Even though the business is by and large Euro denominated, and all our calculations are in Euro, in the end we have to pay in forints, so with the currency's volatility there was a considerable exchange risk, and we had to protect ourselves. In short, I think that hedge funds were either not well enough informed, or courageous enough, to invest in the forint.
Q: Given the current macro worries surrounding Hungary does it surprise you that BC seems able to punch above the weight of the local economy, and does the macro situation worry you at all as an investor in Hungary?
A: I think this transaction provides evidence that a smaller country such as Hungary can gain appreciation by financial markets through such deals. It was a large transaction, and our lending banks, naturally, had questions about Hungary, as to date there had not been such a big private equity buyout in the country, but all those questions were answered positively. By and large, BC operates in international markets, it's one of the country's largest exporters, and its main cost base is in Euros or US dollars. We also have a country and a government that is in essence market-oriented, a government that tries to support business and investment, and also we have a government that is taking clear steps in to the Euro zone and integrating itself further into the EU, so I have no doubt at all that this country is a good location for the company and for our investment.
Q: Does Hungary's expected delay in Euro adoption worry you at all?
A: No, I could also live with BC still using the forint in 10 years. All I need if you like is a free flow of goods and money into and out of the forint for all the payments we make to our customers and suppliers. If in 10 years Hungary is still using the forint, then I still think the company would flourish. BC quotes its prices to European customers in Euros, and some of the raw materials, very crucial ones at that, are denominated in US dollars. If we have the local costs , labor and some suppliers , in forints, I do not see that this endangers the business at all. That said, seeing the government here I'm confident that they are making the right steps toward integrating the country into the Euro zone.
Q: Permira's officially stated approach to investment is "maximizing business potential rather than financial engineering." How so? And why is private equity better at this than public?
A: First of all we want strong management teams, and strong management is independently minded. And we want to be seen as active partners, i.e. reliable partners. We have said that we support BC's investment program and so we will from the financial side, but along the way we need to take critical decisions as well so we aim to give management a fast-track decision-making process. I think the latter is quite different from the normal supervisory board of a public company, which is more formal, which meets only three to four times a year, which is not that hands-on, and which has a longer decision making process. We want to be a more active partner, and I also believe that private equity is a stronger model for the future than public equity because the corporate governance model, I think, provides better guidance for the business and provides faster decision making for management.
Q: Why did Permira make it so explicit from the start of this deal that de-listing from the BÉT was a primary goal of the transaction?
A: It comes back to corporate governance, really. We do have investments in public companies as well, but the classical model we are engaged in is that the company is 100% in investors' hands and can be run as a private company without the obligations that a listed company has with regard to earnings publications and so on. Would it be possible to own, say, 85% of BC and have the remaining 15% publicly listed? Yes, it would, but with 100% ownership and with the company no longer listed on the exchanges, it's easier and preferable. The reason most companies are listed on a stock exchange is as a way to secure additional financing. I think there were two factors in the volatility of BC's business that would have, as a listed company, made debt or equity financing of the expansion difficult. One, the whole oil price issue, which affects the whole petrochemical chain; secondly, the volatility of the forint, as it makes a big difference even on the top line numbers if the forint is at 280 or 240 to the Euro. But, as I said, it's basically a Euro-based business, and while it's much easier to report in Euros than in forints, as a BÉT member the company was obliged to publish earnings in local currency. With de-listing, we do not have this concern.
Q: After the buyout and delisting is completed, VCP will remain as a minority shareholder. Why?
A: Simply because we wanted to invite VCP as a minority shareholder, firstly because they have a good history with BC, and secondly because they are very experienced in Hungary, so we would like to have them participating in the boardroom and sharing this local know-how.
Q: How do you envisage Permira's planned exit in around five years time? Possibly a new IPO of BC shares?
A: Yes, it could be a new IPO, though it's very hard to say how it will happen right now. Financial markets change, industry dynamics change. There could also be a secondary buyout; we are seeing more and more of these, so maybe another private equity firm could step in. There are many potential ways to exit the investment.
Q: Is there also a chance that the five-year investment period will be extended?
A: Yes, it could be. Typically, we say four to six years for our investments, because if you go into the financial math, IRR formula starts to hurt after five or six years, as you are accumulating the equity in a mathematical sense. So to keep an IRR of, say, 24% means each year you need to create more nominal value than before each year, and eventually you arrive at a certain situation when you just say from a financial math point of view it's no longer working. Therefore we contemplate selling businesses after that time, but we have had businesses for shorter periods and longer ones. We have no "legal" obligation to sell after five years , all we mean is we are able to sell at around that time as our investors rely on the assumption that funds will be returned. But we do not have a fixed deadline to sell; we would be foolish to do such a thing, as vendors under pressure are always bad vendors. Instead, we have a good degree of flexibility, and the five years is just a rule of thumb.
Q: After this success in Hungary, can we expect further Permira activity here?
A: All our deals are based on industrial logic first, then a willing seller rather than a specific country. But, in terms of our experience in Hungary, there's no doubt we would do it again. However, I can't see a viable target that will become available. So in terms of availability, no, but in terms of country preconditions there's no doubt Hungary is a good country to execute such transactions.
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Source: Budapest Business Journal; 20070312 |
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© VCP AG 2010
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