TPC Group would go private with sale

A major producer of a key chemical in synthetic rubber, whose shortage has sent tire prices rising, would be sold to private equity firms under a deal that one analyst said under-values the Houston company.
Chemical company TPC Group would go private under the plan announced Monday. Stockholders would get $40 per share from investment firms First Reserve Corp. and SK Capital Partners for a total of about $628 million. The company values the sale at $850 million when including the net debt assumed in the deal.
The company supplies specialty chemical products for industrial use and manufacturing of plastics, synthetic rubber, fuel additives and other consumer items. It is one of the largest producers of butadiene, which is used to manufacture the synthetic rubber in vehicle tires, gaskets and other automotive parts.
TPC has several facilities along the Gulf Coast, including on the Houston Ship Channel and in Baytown, Port Neches and Lake Charles, La.
In company documents released Monday, TPC Group said the acquisition won't affect day-to-day business operations. President and CEO Mike McDonnell and other executives will retain leadership, and no layoffs are expected, according to the documents filed with the Securities and Exchange Commission.
"While this is an ownership change, both First Reserve and SK Capital believe in our company, our mission and support our strategic initiatives," McDonnell said in a letter to employees filed with the SEC.
First Reserve focuses on energy industry investments with main offices in Connecticut, Houston, London and Hong Kong. SK Capital is a New York-based firm focused on chemicals and other specialty products.
The TPC board of directors has approved the deal. Pending a shareholders' vote and regulatory approval, the deal is expected to close in the year's final three months.
Less butadiene
As the supply of butadiene has tightened in recent years, the value of one of TPC's major products has grown, analysts said. Butadiene supplies have declined 25 percent over the last five years, said Edward Yang, head of chemicals and basic materials research at Oppenheimer & Co.
"They operate in an attractive niche that is going to be fairly tight for the foreseeable future," he said. "I'm surprised that the board would sell at such a low price. At $40 a share, that undervalues the company by a significant amount."
Shares rise
TPC Group stock closed at $39.59 on Friday, prior to the deal's announcement. Shares closed up 60 cents to $40.19 Monday.
TPC officials, however, note that the stock was selling for less than $34 per share when news reports about a potential sale first surfaced a month ago.
Butadiene is a byproduct of processing ethylene, a material derived from petroleum and used to create everyday plastics. When ethylene is produced from crude oil, it yields more butadiene than when it is produced from natural gas.
Shale gas
The advent of shale gas has unleashed a bounty of low-cost natural gas in the United States, making it more attractive than crude for ethylene producers but ultimately cutting the butadiene supply.
As a result, butadiene prices have been volatile in recent months. The chemical peaked at $1.55 per pound earlier this year, surging from about 25 cents per pound a decade ago, said Bill Hyde, senior director for olefins and elastomers for IHS Chemical.
"The cost of anything with synthetic rubber in it has been riding up and down with this butadiene price," he said.
Hyde said butadiene prices are expected to stay high for the rest of the year. But the TPC deal doesn't change the outlook.
"I think they will produce the same amount of product as they did before," Hyde said. "If you are a tire consumer, I don't think this will have much effect."