Synthetic rubber is proving to be the best bet in America for traders who profit from acquisitions.
TPC Group Inc. (TPCG), the biggest producer of the chemical butadiene that’s used to make synthetic rubber, already secured an almost 13 percent increase to $45 a share from First Reserve Corp. and SK Capital Partners last week to fend off a rival bid. TPC shares are trading 2.9 percent higher than the latest offer, again signaling merger arbitrageurs expect a heightened bidding war and the biggest price hike of any U.S. deal valued at $100 million or more, according to data compiled by Bloomberg.
Sandell Asset Management Corp., TPC’s third-largest shareholder, said the company should hold an auction to allow the previous counter bidder Innospec Inc. (IOSP) to weigh a new offer. While the current private-equity deal is fully financed and approved by regulators, Sandell may spur investors to rebuff the agreement and seek a higher price, according to MKM Partners LLC. Tullett Prebon Plc said fuel-additives maker Innospec, which is working with Blackstone Group LP (BX), would need to offer at least $47.50 a share to acquire the company that Oppenheimer & Co. predicts will benefit as butadiene prices rise.
“The story is definitely not over,” Steve Gerbel, founder and president of Chicago Capital Management, a Chicago-based hedge fund that focuses on merger arbitrage, said in a telephone interview. “People are highly confident that there’s going to be some more. It’s going to be higher than $45, absolutely.”
Gerbel said he doesn’t own any TPC shares.
James Golden, a spokesman for TPC, declined to comment on whether the company would be open to negotiating with Innospec and Blackstone. Kelly Holman, a spokesman for SK Capital at BackBay Communications, declined to comment, as did Lisa Cradit of First Reserve.
TPC, with a market value of $726 million, makes butadiene and other chemical products for use in everything from tires to carpets and footwear. The company competes in the market for butadiene with LyondellBasell Industries NV, Royal Dutch Shell Plc and Exxon Mobil Corp. (XOM)
In August, TPC said First Reserve and SK Capital agreed to buy the company for $40 a share, about 20 percent higher than TPC’s closing level on July 24, before the stock soared on takeover speculation. That trailed the average premium of 33 percent for chemical takeovers larger than $100 million, according to data compiled by Bloomberg.
TPC shares traded above $40 every day after the Aug. 27 bid was disclosed as merger-arbitrage specialists wagered that the company would secure a higher takeover price.
On Oct. 8, Innospec and Blackstone made a non-binding offer of $44 to $46 a share for TPC, without fully specifying how it planned to finance the deal.
First Reserve and SK Capital countered by increasing their bid to $45, a 34 percent premium to the unaffected share price, and TPC accepted it on Nov. 8 and ended talks with Innospec. TPC shareholders are set to vote on the latest offer, which has already gained regulatory approval, on Dec. 5, the company said.
Patrick Williams, chief executive officer of Littleton, Colorado-based Innospec, said in a Nov. 8 statement that comments made by First Reserve and SK Capital about the lack of strategic fit between his company and TPC were “either false or misleading.” Brian Watt, a spokesman for Innospec, declined to comment further.
Christine Anderson, a spokeswoman for New York-based Blackstone, also declined to comment when asked whether the private-equity firm and Innospec are considering a higher bid.
Thomas E. Sandell, CEO of New York-based Sandell Asset Management, which holds a 7 percent stake in TPC according to data compiled by Bloomberg, wrote to the company’s board on Nov. 9, saying it shouldn’t have broken off talks with Innospec and should hold an auction to allow the suitor to offer a higher price.
Shares of TPC have traded above the increased bid of $45 a share every day since it was disclosed. The stock ended yesterday at $46.31, 2.9 percent higher than the new buyout price, the widest gap for a pending U.S. deal valued at $100 million or more, according to data compiled by Bloomberg.
Today, TPC shares fell 0.7 percent to $45.97.
“If First Reserve is willing to pay $45, the thinking behind this trading higher is that Innospec obviously can pay more because they have real synergies” and cost-cutting opportunities as a strategic buyer, Yemi Oshodi, New York-based managing director of mergers and acquisitions and special situations at WallachBeth Capital LLC, said in a phone interview. “Arbitrageurs will play that call.”
TPC offers Innospec the chance to trim expenses by integrating the butadiene maker’s raw-material production into its operations, according to Chris Shaw, a New York-based analyst at research firm Monness, Crespi, Hardt & Co.
Innospec would be acquiring a company that is poised to increase revenue to $4.1 billion by 2015 from a projected $2.3 billion this year, according to analysts’ estimates compiled by Bloomberg.
TPC is attractive based on its “strong growth prospects and dominant position in butadiene,” which is in short supply, Oppenheimer analyst Edward Yang wrote in a Nov. 2 note to clients. Innospec’s Williams said on a Nov. 1 earnings call that the due diligence the company had conducted on TPC reinforced the value of the business.
TPC’s growth potential means a takeover bid of $50 a share “seems very reasonable,” said Eric Mintz, a St. Petersburg, Florida-based fund manager who helps oversee more than $8 billion, including TPC shares, at Eagle Asset Management Inc.
“The butadiene business that they have is very attractive,” Mintz said in a phone interview. TPC management is “selling the company far too cheaply.”
TPC said in a filing yesterday that it decided to accept the offer from First Reserve and SK Capital because of the high probability of closing before the end of the year, whereas Innospec’s offer wasn’t definitive and a deal would take longer to close.
As a result, Innospec and Blackstone may have to offer at least $47.50 a share, a 42 percent premium to the unaffected share price, to convince management to reopen negotiations, said Sachin Shah, a Jersey City, New Jersey-based special situations and merger arbitrage strategist at Tullett Prebon.
TPC trades at a 70 percent discount to its revenue, making the company a bargain for Innospec, Shah said. TPC had sales of $2.4 billion in the last 12 months, more than three times Innospec’s $763 million.
“The bottom line is the valuation,” Shah said in a phone interview. If Innospec can “acquire a much larger, significant peer and asset, that’s a recipe for success” and “it will come down to their gut to come back with a counter offer.”
With an almost 13 percent price increase and regulatory approval already in hand for the deal with First Reserve and SK Capital, TPC may not be inclined to seek a higher bid from Innospec and Blackstone, said Peter Lobravico, New York-based vice president of merger arbitrage trading and sales at Wall Street Access Corp.
“What you have here is a bird in the hand,” Lobravico said in a phone interview. “They returned to the existing buyer that they have an agreement in place with already. They got a bump” and “the shareholders made out pretty well.”
Still, many shareholders may share Sandell’s frustration with the $45-a-share bid and TPC management’s decision to end talks with Innospec and Blackstone, said Keith Moore, an event- driven strategist at MKM in Stamford, Connecticut.
As a shareholder, “you should be happy that it is raised from $40, but you can’t be happy that this is a process that the board of directors is attempting to cut off before it becomes a full auction,” Moore said. “If they exercise collectively their right to vote, then they can potentially force the board to do something different.”
Eagle Asset won’t be voting in favor of the $45-a-share offer from First Reserve and SK Capital, Mintz said.
“There is definitely an opportunity for Innospec to come in with a higher bid,” he said.
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