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Neochimiki: the end of the saga?DistriConsult report 20.02.2010

This is the most amazing transaction ever completed in chemical distribution. To give you the full picture and a good understanding of the Neochimiki saga, we only used the information published in several news media in Athens and in London, mostly in the Financial Times, as well as in financial and news reports available on the Net. Most of the information used was already put on line on ww.districonsult.com as news items during the last two years. The main questions, to understand what went on, are to be found below:

Sector

Why did Carlyle invest in chemical distribution?

Carlyle is generally investing in defence related projects, aerospace, transportation, energy, infrastructure and real estate. They rarely invested in Chemicals and when they bought Sequa Corporation in 2008, they immediately spun off Warwick International to CBPE.

Athens-based Neochimiki distributes chemical raw materials such as plastics, paints and fertilizers to customers in Southern and Eastern Europe. In 2007, the company posted an 88 per cent jump in revenue for a total of €469.8 million thanks to recent acquisitions and new logistics centres. In 2007, EBITDA rose 153.3 per cent to €83.3 million, from €32.9 million in 2006. The bulk of Neochimiki's 2007 revenue came from domestic operations, which roughly doubled, while its foreign subsidiaries raked in €51.1 million for a 15 per increase over 2006. In 2008, it was expected to grow by another 20 per cent to €100 million, which never materialized.

An odd move for Carlyle which was not involved in any other private equity transactions in chemical distribution which took place in Europe between 2002 and 2009.

Timing   

Why was the deal completed in May 2008? 

In May 2008, everybody knew that the crisis was imminent. The subprime crisis had already occurred in September 2007.

Quote

In May 2008, Carlyle's chairman David Rubenstein said that US. and European banks still face "enormous losses" from bad loans they haven't yet recognized with it taking at least a year before all losses are realized, resulting in the failure of some financial institutions. With sovereign wealth funds having gotten burned as they jumped in at the top, Rubenstein doesn't expect to see them do so again, leaving deep-pocketed private equity firms as possible saviours. Unquote

In March 2008, the Dutch listed Carlyle fund went bust.  Quote: Carlyle Capital Corporation is to be wound up after the $22bn Amsterdam-listed mortgage fund said its shareholders had approved an application for a court appointed liquidator to sell its remaining assets. The move sounds the death knell for an abortive attempt by the Carlyle Group, one of the world’s biggest private equity groups, to tap public markets for an ill-timed and highly leveraged venture into mortgage-backed securities. Unquote  Carlyle knew very well what was going on in the financial world in 2008, but still invested at the wrong time.   

Price

Why such an extraordinary purchasing price?

The transaction took place on the basis of an extraordinary high price of 749 Millions EURO for the total Enterprise value, which is unheard of in chemical distribution for a company this size which additionally showed a stratospheric growth rate in the previous years, and based on a multiple of optimistic earnings which never materialized.  

Quote: Financial Times. August 2009: Dresdner Kleinwort arranged a €550m syndicated loan for the buy-out, which was taken up by Greek banks, led by Emporiki, National Bank of Greece, Piraeus Bank and two small lenders, Millennium Bank and Proton Bank. Neochimiki has been negotiating to restructure the loan, but some creditors are sceptical about its prospects in the economic downturn. Carlyle was advised by ABN Amro and Sal Oppenheim on the Neochimiki purchase, while Clifford Chance and Karatzas and Partners provided legal advice. After the deal, it hired restructuring specialists Alix Partners as advisers. The Greek capital markets committee, the market watchdog, launched and later dropped an investigation into suspected manipulations of Neochimiki’s share price between 2005 and 2008, according to people familiar with the procedures. Mr Lavrentiadis holds a minority stake in Alapis, a pharmaceuticals company he founded following a similar strategy to that of Neochimiki. Unquote

The Neochimiki Vendor Due Diligence and the Due Diligence reports written in 2008 by Bain Consulting, PWC and Boston Consulting Group "BCG" are remarkable pieces of Greek mythology.   

Why Greece?

Carlyle has no investment in Greece, but tends to invest in countries and industries which are strategic to American interests. Greece is in an interesting geopolitical position in the middle of the Eastern Med. Therefore, US interests at the time probably influenced  an investment into a company serving many industries. It was also a generous mark of support to a young and bright entrepreneur involved in several South Eastern European countries such as Rumania and Bulgaria, where the US have also political and economic interests.  

Lavrentis Lavrentiades "LL"

Who is "LL"

LL born in 1972 is 38 years old. He holds a PhD in Marketing from the University of Athens. At age 18, he started to manage some of his late father's businesses. In 2006, LL won the prestigious award of the Hellenic Entrepreneur of the Year and in 2007 the Ernst and Young Entrepreneur of the Year award. Ernst and Young awarded their renowned yearly awards to a string of European entrepreneurial gamblers and deal makers. Some are rich like LL, some are bankrupt like the winner of the 2008 E&Y award, namely Giovanni Burani of the Italian Mode Group "Mariella Burani". 

Quote: The Lavrentis Lavrentiadis Chair in Southeast European Studies was launched formally in Athens on December 8 2009 by Lavrentis Lavrentiadis and CSIS Trustee and Counselor Zbigniew Brzezinski. The event was attended by a substantial press corps and included a panel discussion on U.S.-European relations that was chaired by Janusz Bugajski, the inaugural holder of the Lavrentiadis Chair, and featured Heather Conley, director of the CSIS Europe Program, and Marc Grossman, a senior adviser at CSIS and former US undersecretary of state. On January 29 2010, General James Jones, US national security adviser, was the Statesman who delivered the keynote address at the CSIS forum, entitled “Securing American Interests in an Interconnected World”. “I am pleased that CSIS has launched its Statesmen’s Forum Speaker Series at the beginning of 2010 by hosting one of the most important and respected figures in the American administration, President Barack Obama’s national security advisor, General James Jones,” said Lavrentiadis, Chairman and CEO of the Lavrentiadis Group of Companies. “Such communication between world leaders and top analysts is essential to constructive foreign policy.” Unquote LL's connections to the US political and defence establishment are second to none. He conducted magisterially the Neochimiki IPO in 2005 and led the sale to US politically connected Carlyle in 2008. The Greek media and business establishment are admirative and supportive of LL. Never an Entrepreneur in chemical distribution and related services made so much money for himself in such a short period of time.

Who is Robert Easton?

Dr Robert Easton holds a Doctorate in organic synthesis from Oxford University. He is a Carlyle Partner in London. He is the former co-head of Carlyle’s UK buy-out team, who led the Neochimiki deal. He has retained his position as Partner at Carlyle in London but has since moved to its smaller technology fund. Carlyle has taken a big write-down on Neochimiki, which made losses of €56.6m in 2008, in contrast to analysts’ forecasts of a one-third rise in net profits to about €60m.

Dr Robert Easton made the following announcement on the day of completion: Quote: "Neochimiki's "steady" development into a major player in Greece is a testament to the hard work and vision of its strong and committed management team. Carlyle is delighted to have the opportunity to help Neochimiki reach the next stage of its development by supporting its international expansion plans and providing access to Carlyle's global network in order to deepen the company's multinational customer base. ‘This is Carlyle's first investment in a Greek company and reflects our confidence in the country's strong economic growth prospects as well as Greece's position as a gateway to investment in Eastern Europe. Dr Robert Easton continued. The investment has been made from Carlyle's third European buy-out fund, Carlyle Europe Partners III, which closed in 2007 on €5.35bn. Unquote

Bankers' and Carlyle's reactions to the Neochimiki saga: None yet.  

Bankers quietly wrote off a total amount of around 500 Millions Euros.  One of the leading Bank namely Emporiki Bank was bailed out by their owners Credit Agricole for one billion Euros, a short while after Credit Agricole acquired them.  LL invested recently in Proton Bank who was one of the debt provider to Carlyle for the Neochimiki acquisition.  In September 2009, LL's controlled Alapis smoothly raised 500 Million Euros on the Greek financial market. LL took back Neochimiki under his control in February 2010.

In summary, the saga is closed. Neochimiki went back to LL for an Entreprise Value of 250 Millions EUR, or 30% of its earlier valuation, only eighteen months after Carlyle bought it for 749 Million Euros. Carlyle wrote off its equity investment completly mid-2009, but managed to get back a third of it. 500 Millions Euros evaporated in the rapid process of value destruction. Carlyle's Partners and bankers lick their wounds. Greece will eventually be bailed out.  

Comments are welcome: please mail them to mfermont@districonsult.com: