Ashland is getting out of material and chemicals distribution, selling the business unit, which accounted for 37% of its 2010 sales, for $930 million to TPG Capital in an all-cash deal. The deal is expected to close in March and generate after-tax proceeds of approximately $825 million.
Part of Ashland for more than 40 years, the Ashland Distribution business had $3.4 billion in revenue in 2010, with approximately 2000 employees across North America and Europe, entering the Chinese market in 2009. For the fiscal year that ended on Sept. 30, 2010, distribution accounted for 37% of Ashland's sales, ahead of its Hercules Water Technologies (20%), Consumer Markets (19%), Performance Materials (14%), and Aqualon Functional Ingredients (10%) units. Overall, distribution generated sales of $3.4 billion and EBITDA (earnings before income taxes, depreciation, and amortization) of $89 million. Relative to its outsized stature within the company's sales, the business's lower margins meant that distribution did not contribute as much to earnings, accounting for only 10%.
In a presentation to investors, Ashland executives said the sale marks "a major step in transformation to a high-performing, specialty chemicals company." The new company will orient itself around four commercial units going forward: Ashland Aqualon Functional Ingredients, Ashland Hercules Water Technologies, Ashland Performance Materials, and Ashland Consumer Markets, which consists of its Valvoline motor oil brand.
Under these new groups, North America will dominate regional sales, accounting for 55%, followed by Europe (26%), Asia Pacific (12%), and Latin America/other (7%). In terms of sales and earnings, sales at Ashland sans distribution would be led by its consumer markets and water technologies businesses (31% apiece), followed by performance materials (22%) and Aqualon functional ingredients (16%). In pro forma earnings of $800 million, consumer markets would account for 37%, followed by Aqualon functional ingredients (27%), water technologies (25%), and performance materials (11%).
TPG Capital is the global buyout group of TPG, a private investment firm founded in 1992, with more than $47 billion of assets under management. The company's investments in the energy, chemicals, and industrials sectors have included Kraton Polymers, Alinta Energy, American Tire Distributors, Armstrong World Industries, Belden & Blake, Copano Energy, Denbury Resources, Energy Future Holdings (formerly TXU), and Graphic Packaging, among others.
In the distribution arena, Ashland competes with privately held companies M. Holland and Muehlstein, as well as public businesses like A. Schulman and PolyOne. A. Schulman operates masterbatch, special powder, and engineered plastics units in addition to distribution. In 2010, the distribution unit was A. Schulman's third largest, accounting for 19% of sales behind masterbatch (48%), and engineered plastics (31%). It is largely focused on polyolefins distribution, having reached an agreement in 2010 with Dow Chemical to contract for all its grades of polyethylene and polypropylene to the Americas. In a company review, the company noted that approximately 35% of its business in Europe is contract distribution and that it is "moving in this direction in the U.S."
In PolyOne's third-quarter earnings statement, chairman, president, and CEO, Stephen D. Newlin, noted that its specialty platform and distribution units achieved record levels of quarterly operating income. According to that report, out of PolyOne's five business units, distribution had the second largest quarterly sales, totaling $238.4 million and trailing only its specialty platform, which brought in $272.1 million. In terms of operating income, however, distribution ($12.2 million) trailed specialty ($24.1 million), performance products ($17.9 million), and global specialty engineered materials ($14.1 million).