Chemical Distribution – Why so Attractive to PE Funds?
The recent announcement that TPG will acquire Ashland’s chemical distribution business was no surprise to most of the North American distribution community. What is noteworthy however, is that, again, a major chemical distributor has found a home in a private equity fund’s portfolio. Ashland now joins Brenntag (BC Partners investment – recently IPO’d), Univar (Clayton, Dubilier and Rice recently joined CVC as investors) and Azelis (3i) as a PE owned chemical distributor.
In addition to these large (USD Billion +) deals there have been a number of recent smaller deals in which PE firms have invested in chemical distributors. These include Post Capital’s investment in BHS and AEA’s investment in Reladyne. Reladyne is a consortium of four regional lubricant distributors.
Other deals in the distribution space are rumored to be in the pipeline and we’ll comment on those as they are announced. Coincidence? No. So, what’s the attraction of distribution for PE firms? In our view, it’s three major of factors:
- The industry is fragmented and there is still significant room for consolidation. North America is the most mature market where the top 5 players have around half of the market. Europe is much less concentrated and Latin America and Asia, less so again.
- Distribution businesses enjoy economies of scale. The ability to manage larger networks with a relatively fixed investment in IT and management systems is one factor driving consolidations financed by PE funds.
- What was once primarily a relationship business now lends itself to quantitative management methods, well understood by private equity companies and their consultants.
The case for chemical distribution as an interesting investment is made fairly convincingly by the data in a paper by BCG, published earlier this year.
Looking forward, we see continued acquisitions by the North American big three, Ashland, Brenntag and Univar and by others. Consolidations driven by the scale related factors above will continue to be financed by these PE sponsored companies. Owners of small, regional and specialized chemical distributors may therefore find 2011 a good year in which to sell – or to compete in the interstices left between the ever larger market leaders.