The Effect of Bankruptcy on M&A Activity During the first quarter of 2009, we have seen a number of bankruptcy filings in the chemical industry. First came LyondellBasell in January. Next was Tronox. And in March it was Chemtura’s turn to go Chapter 11. Nova did not go Chapter 11, but did accept a buyout from Abu Dhabi’s International Petroleum Investment Co. in the midst of a liquidity crunch. Clearly the financial crisis is reshaping the chemical industry. But what effect does a bankruptcy filing, or the specter of a bankruptcy have on mergers and acquisition activity in the chemical industry? In the article that follows, we will explore this subject in further detail.
The specter of bankruptcy: Let’s first look at what a possibility of bankruptcy has on M&A activity. In many cases, it may accelerate it. The Nova deal with IPIC is a good example. Chemical Week noted that “Nova’s shares [had] been hit by the global downturn and concerns of Nova’s liquidity position as it sought to refinance pending debt maturities….. The company looked at several options to Chemtura is also another case where the specter of bankruptcy accelerates M&A activity, although here, unlike Nova, Chemtura failed to divest and instead filed Chapter 11. Prior to filing, in order to raise cash, Chemtura put its crop protection and petroleum additives businesses on the block with the aim of selling one of them if the terms were right. It ended up opting for Chapter 11. “Despite our efforts to increase liquidity, including through the potential sale of a business, our reduced liquidity position, combined with the anticipated expiration of our bank waiver, led us to determine that a court-supervised restructuring was the best course of action” said the company’s CEO. So here again, the specter of bankruptcy accelerated M&A activity. When it comes to making acquisitions however, the specter of bankruptcy can dampen or kill all activity. While divestitures may accelerate, clearly a Chemtura or a Nova will have difficulty and probably little appetite to make acquisitions. M&A activity after Chapter 11: As we said above, M&A activity may come to a halt once a bankruptcy filing has been made. Clearly that is the case with Chemtura’s potential divestitures, although that may change over time.
A somewhat unique situation, but illustrative nevertheless is the story of WR Grace. Grace filed Chapter 11 in April of 2001 to resolve asbestos claims and liabilities. It has been in Chapter 11 since then, over 8 years now. What effect has this had on M&A activity at the company? In 2002 it bought a construction chemicals business. In 2003 and 2004 it bought 3 chromatography products businesses. In 2004 Grace bought a roofing membrane business and in 2005 and 2006 they bought two catalyst businesses. In addition to these acquisitions, during the period they have been in Chapter 11, Grace has sold an alumina wash coats business and a plant in
So what can buyers and sellers learn from all of this? If you are seeking acquisitions, it would behoove you to look hard at companies that are faced with a looming bankruptcy or are already in Chapter 11. Opportunities may be out there. And if you are a seller, don’t shy away from a potential buyer that is in Chapter 11. They may be very able to make an acquisition.
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address the liquidity crunch including a sale and additional bond and equity issues.” The end result - - a decision to sell to IPIC for $6 a share. A far cry from the $29 a share it had traded at during the past year, but also above the $1 a share level that it had also seen more recently before the deal with IPIC.
But a Chapter 11 filing may also accelerate M&A activity. Foamex recently filed for Chapter 11 (for the second time) and just announced an agreement to sell substantially all its assets to an affiliate of MatlinPatterson. While the deal has not closed yet and there are a number of conditions that must be met, it nevertheless is illustrative of the fact that once in Chapter 11, a company may see a divestiture of all or parts of it’s business as the best way out.