Primary Preview: Safic-Alcan €470M TLB Anchored by €150M-€200M Investor; Concerns Over Structure, Scale Eased by Strong Cash Generation, Variable Cost Base

Safic-Alcan’s proposed €470 million term loan B to fund an acquisition and refinance debt has been anchored by one fund taking between €150 million to €200 million of the new loan, sources said. The French specialty chemicals distributor’s complex ownership structure and lack of a single strong sponsor was a deterrent for some accounts, while its limited scale versus some of its peers and a lack of historical earnings were also concerns. However, the group’s asset-lite model means it incurs virtually no capex, resulting in strong free cash flow generation, while its variable cost base leaves it well positioned to navigate an expected economic downturn in 2023, prospective investors said.

The deal leaves the group 4.45x net levered based on pre-IFRS 16 last-12-months’ adjusted EBITDA of €104.6 million as of October 2022. Existing and new shareholders contributed €570 million of equity, accounting for a solid 55% equity cushion. The group’s EBITDA is also pretty clean, including just €2.3 million of addbacks, sources noted.

Safic-Alcan is majority-owned by management, which owns 52.5% of the group but has 76.3% of the voting rights. The remaining stake is owned by private equity funds Safard, EMZ and SGCP, who have recently been joined by IK, Equistone and Geneo. The unconventional structure and presence of mainly smaller private equity funds put off some investors, given that it raises the question of how supportive shareholders would be if the company were to require any support, sources said.

The group operates two divisions. Its Performance Products unit, which distributes specialty chemicals such as rubber additives and polymers, adhesives, coatings and plastics, accounted for 69% of 2021 sales, while its Life Sciences unit, which distributes ingredients for the pharmaceuticals, cosmetics/personal care, nutraceuticals and food ingredients sectors, accounted for 31% of group sales.

Safic-Alcan’s relative lack of scale is also a concern for many investors. The group is relatively concentrated in terms of sectors, with its largest segment Rubber & Adhesives accounting for a third of its gross margin in 2021 and providing fairly commoditized products with weak end markets such as autos and construction. It is also highly concentrated geographically with Europe accounting for roughly 80% of its 2021 sales, sources noted. According to S&P, global peers such as Azelis, Brenntag and Univar generated more than 3x to 15x as much EBITDA as Safic-Alcan did in 2021.

The group also presented just two years of historical financials to investors, which is not sufficient to demonstrate a solid track record, sources said. Safic-Alcan’s EBITDA has almost doubled from €51.2 million in 2019, far outpacing sales growth, which raises the question how much operational leverage the figures include, and what that could mean for earnings in a downturn. Management told investors that specialty chemicals prices tend to hold up even in downturns, but volumes will likely drop next year as a result of the expected macroeconomic headwinds facing Europe, sources agreed. Safic-Alcan has a highly variable cost-base, however, which is a mitigant and should enable it to protect its margins, it added.

Another key strength of the business is its high level of cash generation, given that its asset-lite business model requires almost no capex. Based on approximately €100 million cash EBITDA, around €35 million of interest costs, negligible capex spend and roughly €20 million of cash taxes, the group could generate around €45 million of free cash flow ahead of working capital, which is almost half a turn of deleveraging per year. Even if earnings fell back to 2019 levels, the group would still remain free cash flow positive, one source noted.

While Safic-Alcan experienced approximately €70 million outflow for working capital over the last 12 months, this was largely due to strong growth in the US, where Chinese suppliers operate on longer lead times, and rising commodity prices, however management expects this to stabilize. And working capital is counter cyclical, which means that if volumes drop, the group would benefit from a working capital inflow, sources added.

The deal has a preliminary B rating from S&P and B2 rating from Moody’s. The senior secured term loan B pays Euribor+512.5 bps and is being guided at an OID of around 91.5, sources said. The pricing looks attractive for the rating, even though the ratings could come under pressure during the downturn, the sources said.

The deal includes a 6.5-year €90 million RCF paying E+300 bps, sources said.

Safic-Alcan’s capital structure pro forma the transaction is below:
 
Books close today at 1 p.m. GMT. ING Bank, Natixis and Societe Generale are physical bookrunners. Credit Industriel et Commercial is the bookrunner.

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–Robert Schach