Private Equity Fights Over the Most Popular Deal In Town - Bloomberg

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OPINION APOLLO'S CHEMICAL ROMANCE

Private Equity Fights Over the Most

Popular Deal In Town

$12 billion Akzo auction is a test of buyout frm restraint.

By Chris Hughes

Photographer: Jasper Juinen

https://www.bloomberg.com/gadfly/articles/2018-02-12/private-equity-jostles-for-most-popular-deal-in-town[2/12/2018 7:57:49 AM]

Private Equity Fights Over the Most Popular Deal In Town - Bloomberg

The probable sale of Akzo Nobel NV's specialty chemicals unit is a test of private equity's ability
to show a little restraint. The tension in the auction seems to be tightening, while the pressure
on the Dutch paint-maker to sell is arguably easing. It's a recipe for someone ending up with
buyer's remorse.

Akzo's own investors, and potential bidders, had been eyeing a carve-out long before it was
announced almost a year ago, after PPG Industries Inc. made an unsolicited takeover proposal
for the whole company.

The attraction to private equity is a strongly cash generative business that looks more resilient
than commodity chemical production. The deal math is seductive. Bernstein Research estimates
a purchase price of 10 billion euros ($12 billion), equivalent to 10 times this year's expected
Ebitda. Assume the unit can sustain net debt of 6 times Ebitda and you'd only have to pay 4
billion euros for the equity.

A buyer might potentially double their money. Ebitda could plausibly be lifted to 1.3 billion
euros through cost savings and natural growth, Bernstein reckons. Use cash fow to pay down
700 million euros of debt, sell the business on the same 10 times multiple, and the equity at exit
would be nearly 8 billion euros.

Over three years that's a tasty 25 percent internal rate of return. Might some bidders be willing
to settle for lower returns to win the auction? The temptation must be there, given that private
equity frms have abundant funds and targets like this are few.

The snag is that returns may fall off sharply in a bidding war above 10 billion euros. The frst
problem is that it might not be possible to add much more than 6 billion euros of debt to the
deal. That means putting in extra equity as the price rises. To achieve a 20-percent-plus return
on a higher initial price would put additional demands on the exit, requiring either a quicker
expansion of the business or selling it on a higher valuation. That's a tall order.

Given that most bidders probably have access to the same fnancing packages, some other kind
of edge will be needed to win. Apollo Global Management LLC appears to be showing some

https://www.bloomberg.com/gadfly/articles/2018-02-12/private-equity-jostles-for-most-popular-deal-in-town[2/12/2018 7:57:49 AM]

Private Equity Fights Over the Most Popular Deal In Town - Bloomberg

cunning here. Having enlisted the support of an industry partner in German chemical maker

Lanxess AG, it's now roping in a fnancial partner in Dutch pension fund PGGM, according to
the Financial Times. The former should give it more confdence in fnding industrial synergies
while the latter should make it look like a more politically palatable private equity owner.

A three-way industrial-fnancial consortium may be better placed to win. But it's potentially
cumbersome, and may still not be enough to see off a desperate private equity frm willing to put
returns second to winning the deal.

Akzo is, of course, still maintaining that a demerger is possible. Given the feeding frenzy, it will
have to come up with a good explanation as to why today isn't the time to sell.

This column does not necessarily refect the opinion of Bloomberg LP and its owners.

To contact the author of this story:

Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:

James Boxell at jboxell@bloomberg.net

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https://www.bloomberg.com/gadfly/articles/2018-02-12/private-equity-jostles-for-most-popular-deal-in-town[2/12/2018 7:57:49 AM]