Celanese likes to be a winner. This global integrated producer of value-added industrial chemicals is either No. 1 or No. 2 in the markets it focuses on. Products include things such as acetic acid, vinyl acetate monomer, and polyacetals. But a winning company does not always make a winning IPO.
Celanese has all the elements of a successful chemical manufacturer: huge capacity, operating efficiencies, proprietary technology, and a competitive cost structure. Its other advantages include a global reach through 24 production facilities, as well as an extended reach through international strategic investments and joint ventures.
Moreover, the chemicals industry has been strong in the past few months, as seen with the stock price moves of DuPont
So this week, Celanese, which is listed on the Frankfurt exchange, is expected to issue its stock in a U.S. IPO. The offering will be around a billion dollars, with 50 million shares set to go at a price range of $19 to $21 each. The lead underwriter is Morgan Stanley
Interestingly enough, it was in April 2004 that The Blackstone Group, a private equity group, purchased Celanese for $3 billion (The Blackstone Group put up $650 million in equity and borrowed the rest). It now looks like the firm will cash out at a staggering 400% rate of return.
How? Last year, Celanese did a junk bond offering and used the $500 million to pay a dividend to The Blackstone Group. Also, Blackstone will get a check for $952 million from the proceeds of this week's IPO. After the IPO, The Blackstone Group will retain 60% of Celanese. If the stock price is $20, the market cap will be roughly $3.2 billion (because there will be 158.7 million shares outstanding). Thus, The Blackstone Group's equity value will be $1.92 billion.
So at the end of the day, Blackstone will be enjoying $3.3 billion in total returns on an out-of-pocket investment of $650 million. Yes, this represents one of the most successful private equity investments of the past few years.
But it looks like most of the gains have been wrung out, leaving little for investors in the public offering. For starters, Celanese is saddled with debt of roughly $3.2 billion. Much of this is from Blackstone's leveraged buyout, which includes senior credit facilities, floating-rate term loans, senior subordinated notes, and senior discount notes.
True, the company generated EBITDA of $801 million on $5.4 billion in sales for the 12 months ended September 30, 2004. But, with such a huge debt load, excluding interest does not make a lot of sense. Factoring in interest expense shows Celanese lost $21 million on an operating basis for those 12 months. Furthermore, it looks like the fourth-quarter results will look particularly ugly because of "certain significant charges." Items we know of include $50 million in impairment charges for the acetate division, impairment for a fuel cell division, and severance payments of $40 million. There are also several acquisitions that need to be integrated.
Basically, this looks like a case where the "smart money" got as much money as possible, leaving the scraps for public investors. For IPO-hungry individual investors, this is one issue that's probably best to pass on.
Fool contributor Tom Taulli does not own shares mentioned in this article.