In the same way that the manufacturing sector has folded in on itself as City investors continue to lose interest in old economy stocks, so has the chemical industry as the market continues to contract.
Over the past three years, companies in this sector in the UK have either been sold off to foreign bidders – as was the case with BTP, which was bought by Swiss-based Clariant in January 2000 for £1.1bn – or they have been satisfying the voracious appetites of large venture capitalists by actively splicing and selling their non-core interests.
Last year ICI sold off a large chunk of its chemical operations to Ineos, an investment house owned by Jim Radcliff, a major player in the chemicals field, who in 1999 also bought ICI’s acrylics business for £505m, in conjunction with Charterhouse Development Capital.
Just last month BC Partners and Cinven were shortlisted by BP as potential bidders to take over the chemical activities of Burmah Castrol, wich oil giant BP purchased for £3bn. Credit Suisse First Boston has been brought in to jettison these areas, expected to raise around £800m.
Laporte, however, has been, or is currently experiencing, both of these situations. Ironically, it is believed – although neither side has confirmed it – that BTP’s buyer Clariant first had its beady eyes on Laporte back in April 1999.
Laporte, however, opted in September last year to sell off nearly 60 per cent of its businesses to US buyout giant Kohlberg Kravis Roberts & Co (KKR) for £823m, including its pigments and additives, formulated products and compounds and electronics divisions through newco KL Holdings. Two months later it announced its intention to be taken over by German-based Degussa-Hüls, an E.ON company formed last year from the merger of German conglomerates Veba and Viag.
Degussa is itself currently merging with SKW Trostberg while being engaged in talks with Cinven and Investcorp, which have made a euro1.2bn (£832.5m) joint bid against Johnson Matthey for Degussa Metals Catalysts Cerdec, its prec
ious metals, automotive and ceramic pigments subsidiary.
It has also been announced that once the deal is completed, Laporte’s chief executive Jim Leng will leave with a £860,000 payoff, and finance director Michael Kayser will also depart with a year’s salary of £230,000.
For Nicholas Smith, director of legal affairs and company secretary, who also sits on the executive committee at Laporte, the past few months have very much been a period of transition. Since Laporte sold off over half of its business to KKR, the in-house legal department has been severely reduced from having three lawyers to just Smith. Its one US lawyer went over to KL Holdings, while the UK lawyer is being made redundant and will depart in March. So besides Smith, that leaves just a deputy company secretary and a handful of administrative staff.
But while Smith says he will have his UK lawyer until March, which is when the Degussa deal is scheduled to be completed, he adds: “There’s not so much running around when you’re the offeree – most of that’s done by the offeror. But certainly, there can be legal negotiations to deal with, like the details of the offer and the competition aspects.”
Contrary to Smith’s underplaying of his role on the current Degussa deal, he and Laporte’s two other lawyers played a significant role on the KKR deal. Each was heavily involved in the transaction, not least Smith, particularly since taking a place on the board. He says the deal was completed in less than four weeks, with – unsurprisingly – Slaughter and May acting as counsel with financial adviser Lazard, and Clifford Chance representing the other side with Merrill Lynch and Chase Manhattan.
The deal was one of the defining moments of 2000 for Laporte, due in part to the size of the transaction, but also because KKR stayed true to its legendary reputation as a fearless investor: earlier that year it took engineering group Wassell private for £627m. By October last year the value of buyouts in the UK overall totalled a staggering £17.4bn.
Smith says: “[The deal] was stretched over 10 different jurisdictions where there was a mixture of some sales of companies and some sales of assets.”
One major area of complexity involved France. Smith explains: “We had to carve out a French piece because you can’t enter into the contract sale of a business without a consultation with the works council. We had a put-and-call option so that once the consultation had taken place we went and called it.”
The fact that the deal had to be announced before any movement in the share price occurred added extra pressure to the transaction. And although the deal was completed over a weekend, to be announced on the Monday, a number of factors had to be considered.
Smith says: “Towards the end of the deal, if the share price had moved on the Friday we would have been prepared to make an announcement. Before that it would have been price-sensitive.”
On the Degussa bid, Slaughters is again acting for its long-term client, but this time is facing Freshfields Bruckhaus Deringer, which is advising the German bidder.
The company has used Slaughters for a number of years. It has acted for it on the majority of its larger deals, including its £611m cash purchase of Inspec in 1998.
However, Smith says: “Allen & Overy (A&O) is brought in if Slaughters is conflicted out on a deal.” Last year, for example, A&O advised Laporte on its sale of four performance chemicals plants at Four Ashes in Wolverhampton to US-based company Schenectady International Group for £20m. This was due to Slaughters being conflicted out because it had acted for the original seller of the property to Laporte.
Smith says that the company is also disposed to using Slaughters on competition, and also uses it or A&O on environmental law, adding: “On environmental it just depends – A&O and Slaughters both have good departments.”
At present a large chunk of the day-to-day work is kept in-house. Smith says: “Apart from trying to run the business generally, there’s a lot of work on contracts to be done.”
On the larger deals that the company has been involved in, the in-house team has found itself conducting a large amount of due diligence work.
There is no doubt that Smith works in a continually morphing sector, which necessitates particular skills on the part of those lawyers who operate within it. “I’m a corporate lawyer and a general counsel, so I have many areas of expertise,” says Smith. “There are also two specialised areas in the chemical sector: environmental issues are very important, and I’m involved in quite a lot of joint venture work.”
As with a large majority of in-house departments, human resource-related issues are sent outside, specifically to Hammond Suddards Edge.
These firms are also on call to advise the company’s various bases throughout the country, which include Cleveland, Wolverhampton, Ellesmere Port and Southampton.
While these are the firms that make up the panel, which Smith says he likes to keep small, he also admits that he was about to conduct a review of which practices Laporte used; but since the massive overhaul in its corporate structure, plans for the review have been put on hold.
However, Smith says that once the German company takes over the running of Laporte, it may have its own ideas about which law firms should be used on a regular basis. “It may want to keep them,” he says. “I’d recommend staying with these firms – they know the transactions, and people need that continuity of knowledge.”
Until March, though, the future remains hazy for Laporte, and until the deal with Degussa is completed, what becomes of the company’s law firms is anyone’s guess. They can be sure, though, that Smith will be the first to fight their corner.
Head of Legal
|FTSE 250 rating||48|
|Legal capability||Two lawyers|
|Head of legal||Nicholas Smith|
|Reporting to||Chief executive Jim Leng|
|Main location for lawyers||London|
|Main law firms||Allen & Overy, Eversheds, Hammond Suddards Edge, Hughes Hubbard & Reed, Slaughter and May and Stevens & Bolton|