Paulson and Apollo ramp up Lyondellbasell ownership as post reorg share price dips below former Reliance bid valuation
source: Debtwire 19-Jul-10
Paulson and Co.have been accumulating chunks of Lyondellbasell in OTC trades following the chemical giants April 30 bankruptcy emergence, according to two traders, three share holders, and a sell side analyst.
The hedge fund owned a tiny sliver of Lyondell debt that was equitized in the restructuring, and now holds around 3% of the company's shares thanks to a recent buying spree, said one of the traders and one of the shareholders.
Paulson's bulk up seizes on a recent dip in Lyondells share price, and also plays to the expectations that the company is a merger/arbitrage opportunity, all the sources said. That's because Lyondells current share price valuation is hovering below the USD 14.5bn non-binding bid that Indian conglomerate Reliance Industries floated during reorganization.
Through Lyondell Reliance was looking to create the largest international chemical company in terms of revenue, passing BASF. However, those aspirations met resistance during Chapter 11 from Apollo-led lender group that sought and won equity ownership in Lyondell for themselves, as reported previously.
Didn't sell in May
Reliance's in-court valuation has been vindicated somewhat by poor performance of LyondellBasell's new equity following the company's emergence from bankruptcy on 30 April. The stock is quoted at USD 16.20 per share today, implying a USD 9bn market cap and a USD 14bn enterprise value. That is significantly lower than the post emergence high of USD 23 per share hit in May, which valued the total enterprise at USD 18bn. The lower valuation could make the company even more attractive to Reliance now, said the sources.
'If Reliance wanted the company six months ago, they should still want it today. The only thing that's changed is it's trading cheaper," said a shareholder.
For Paulson, hunting for merger-arbitrage plays follows the recent bulk-up strategy it employed in Cadbury Plc and Rohm and Haas shares respectively after Kraft Foods and Dow Chemical made buyout bids, noted the sources.
Not to be outdone, Apollo has been increasing it's stake post-emergence, up to more than 30% from the 20% slug it received through restructuring, said the first trader and two of the shareholders. The fund controls three of Lyondells nine board seats.
Lyondell could also be of strategic importance to Apollo, since it presents potential tie-up synergies with it's other chemical portfolio company's Momentive Performance Materials and Hexion Specialty Chemicals, as reported.
Officials from Paulson, Apollo Management and Lyondell declined to comment, while calls to Reliance officials were not returned.
Equity sweet spot
Some of Lyondell's share price dip can be blamed on global economic fears since 35% of the company's revenue comes from Europe, said the sources. Nevertheless, the company is expected to report positive 2Q10 earnings later this month , said the shareholders, one of the traders and a sellside analyst. The sources estimate the company will report between USD 650m-USD 700m of EBITDA in 2Q10, up from the USD 580m generated in 2Q09 and the USD 654m reported in 1Q10. For 2010, the sources estimate LyondellBasell will generate around 2.7bn of EBITDA, up from USD 2.3bn generated in 2009.
Based on that 2010 estimate, Lyondell shares are trading tody at a 5.2x multiple, more than 1x inside the average 6.3x 2010 EBITDA trading multiple of competitors Dow Chemical, Eastman Chemical, Huntsman, Celanese Corp. and Westlake Chemical, said a hedge fund analyst.
" Lyondell just hasn't found it's range yet. Part of that is because it's still illiquid and not registered with the NYSE, there's no sellside coverage, and it's still a new company trying to sort out the merger synergies," said one of the shareholders.
Earlier this month Lyondell filed an 8-K saying it plans to seek NYSE registration. The shareholders expect the company will be registered by the end of July.
by Andrew Ragsly
Source: Debtwire, US Securities and Exchange Commission documents
Intel. Grade: Strong Evidence