Recently the Quinpario Acquisition Corp., (NASD: QPAC) came across my cognitive radar. This is a blank check company based in St. Louis, MO, [that] was founded recently specifically for the purpose of acquiring businesses in the specialty chemicals world. It consummated its IPO on August 14, 2013 with an offering price of $10. As one might expect of a company with nothing yet except a business plan, the movements of its price since then have been recorded in pennies.
QPAC filed a prospectus with the Securities and Exchange Commission on August 9, 2013. Under the heading for the "use of net proceeds" of its IPO, the prospectus says that the company will spend only 13% on due diligence of prospective targets, "excluding accounting and legal due diligence." But it will spend more than three times that, 44% of its net proceeds, on those legal and accounting DD expenses. One might take that as a sign of the times. A company that exists solely to buy specialty chemicals companies is spending almost half its newly raised cash on the legal / accounting side of DD, only one-third of that on the operational side.
As it happens, just before I learned the name "Quinpario" I had written here the world of chemical industry acquisitions, summarizing a report from the global consultancy A.T. Kearney. The synchronicity of timing led me to go back to Kearney for more insight into this M-and-A space.
I spoke recently to Andrew Walberer, a partner at A.T. Kearney's chemical industries practice in the Americas, based in the Chicago office. The first of the questions below was the only one directly inspired by the Quinpario matter, the other questions range broadly.
AllAboutAlpha: What is meant by "specialty chemicals" (or "specialty and fine chemicals") as distinct from the remainder of the chemicals industry?
Andrew Walberer: 'Specialty and fine' usually refers to chemicals that are far downstream from oil and gas feedstock, having undergone a number of chemical transformations to impart specific properties. They are typically sold and priced based on their performance rather than their cost to produce. Specialty chemical businesses tend to have higher and more stable profit margins over time compared to more cyclical commodity chemicals.
AllAboutAlpha: I saw in your report that one of the major trends in the chemicals M&A world is toward greater vertical integration. Can you give me one vivid example?
Walberer: Yes. In July 2008, Dow Chemicals (NYSE:DOW) announced that it would buy Rohm & Haas. The deal rationale was for Dow, a more commodity driven company, to move downstream, toward specialty products and the end users. Rohm & Haas produced chemicals for paints, electronic materials, and other specialty applications. This deal is a good example of a broad trend toward downstream and specialty chemical acquisitions, especially in 2007 and 2008. There is also, more recently, a countertrend of downstream-centered firms trying to acquire the sellers of their raw materials when doing so enables the acquirer to capture a feedstock advantage, for example by being closer to advantaged shale gas based feedstock.
AAA: Do the antitrust authorities often pose a threat to a merger in this space? We've recently seen a number of examples of the consequences of such review, from stock exchanges to the airline industry.
Walberer: For the most part the chemicals industry is sufficiently fragmented, and in many areas very competitive, and the antitrust implications of a proposed merger typically aren't at issue. It is possible to imagine an exception. Consider titanium dioxide – the most widely used white pigment – DuPont (NYSE:DD) has a market share of about 20%. If DuPont were to propose the acquisition of one of the other big players in that market there would likely be regulatory scrutiny. But in the normal course of events, that is not an issue, no.
Talking About Europe
AAA: Let's talk about Europe. I understand that chemicals companies there are coming into play. Is that accurate?
Walberer: In general, the desire of U.S. based companies to divest themselves of underperforming European assets and the resulting exposures is a driver, part of the reason assets come onto the auction block. The European chemicals industry, due to demand and feedstock competitiveness challenges, will go through some form of restructuring.
AAA: Do you see anything that could turn that around, and induce multinational companies to hang onto their Euro assets? There has been some good economic news out of Europe of late.
Walberer: If we were to see stabilization on the part of those countries in Europe that have had the greatest difficulty with their sovereign bond markets and their banking systems, then that would be a signal – it would seem less imperative for companies to put those assets up for sale.