Deal Mechanic Bridgepoint CABB

When Bridgepoint acquired CABB in April 2011, it became the third consecutive private equity owner of the business. A Germany-based chemical manufacturing business, CABB was historically part of Clariant, a Swiss chemicals business. Utrecht-based Gilde Buyout Partners carved out the business in 2005, before selling it to AXA Private Equity.

CABB is a supplier of monochloroacetic acid (MCA), a material which is used in a wide range of sectors. For example, it’s used to make artificial caffeine in diet cola; to make low-fat yoghurt with a creamy texture; to make non-smear lipstick; and to make PVC window frames resistant to UV light.

Under AXA, CABB entered the custom manufacturing side in 2007 by buying a small business unit from Syngenta that provided intermediates and specialty chemicals to a range of customers in the agrochemical, pharmaceutical and industrial sectors.

So when Bridgepoint became the new owner of CABB, it had two main challenges.

While the MCA part of the business had good margins, it was operating in a low growth area, according to Marc Zügel, a director at Bridgepoint. And although the custom manufacturing business was growing, it was still sub-scale: in most of its markets, it wasn’t even among the top three suppliers.

Three years later, CABB had more than doubled its profits, while increasing revenues by more than 30 percent. Additionally, more than 300 jobs were created. When Bridgepoint sold the business to Permira in April, it netted a respectable 2.4x return, according to a source familiar with the matter. Here’s how Bridgepoint did it.

1. BUYING IN FINLAND

The first thing Bridgepoint did after sealing the CABB deal was to invest in the agrochemicals custom manufacturing side of the business. It therefore bought KemFine, a Finish business, three months after the original deal. As a result of that acquisition, this division of CABB’s business went from number eight to number three in the world.

“The agrochemical end-market is very consolidated with big customers, and they need suppliers that are sizeable. After the acquisition of KemFine, [customers] immediately turned to us and wanted us to produce much more for them.” This required substantial capital expenditure to develop extra plant capacity, he adds. “Of the €100 million capital expenditure, €50 million alone went into building a new plant in Switzerland and a [plant] extension in Finland.”

Because CABB and KemFine fitted so nicely, the add-on immediately paid off, Zugel said. “The output of the Swiss facility was completely sold by the time the facility became operational, so it will already add €10 million of EBITDA this year. Since then, our limitations to growth have been our ability to have spare capacity.”

2. FINDING A CHLORINE PRODUCER IN CHINA

The next thing Bridgepoint did was to try and take the MCA business into China, which is the largest MCA market in the world, with growth of somewhere between 7 or 8 percent.

But entering China wasn’t easy – especially since Bridgepoint was after a very specific business. In order to produce MCA, you need chlorine, explains Zügel. “It makes no sense to build a chlorine plant to produce MCA, so you need to partner with a business that has spare chlorine.”

Bridgepoint looked at more than 20 producers over the course of two years, as it searched for a business that met its normal environmental and safety standards. It finally found a state-owned business that ticked all the boxes. “It took us 12 months to negotiate this deal for a relatively small add-on acquisition. But we needed the chloride – which we now use at very favourable rates – and it is a new site,” says Zügel.

Bridgepoint’s team in Shanghai was vital in the negotiations, he adds. “We could not have done this from Europe, without our Chinese portfolio support office.”

By increasing capacity by 40 percent on the MCA side, it meant that Bridgepoint brought revenue growth back into the MCA business, Zügel adds.

By expanding both sides of the businesses, CABB has now become one of the leading suppliers of active ingredients to the global agrochemicals, pharma and personal care industry. “60 percent of the business today is in agrochemicals and CABB’s main customers are the large agrochemicals majors. They have about 75 to 80 percent of the agrochemicals market and we supplying them pretty much all on a global scale.”

3. CONVINCING CUSTOMERS

Creating and maintaining a good relationship with customers was also a key element for CABB’s success.

For instance, the difficulty with the agro-chemical industry is that it is completely seasonal, according to Zügel. “You apply the agrochemicals during one to two week windows during the growing season depending whether it is a herbicide, fungicide or insecticide. If you miss them, you miss the entire season.”

Customers always worry that if something goes wrong at their suppliers’ end, they won’t get the intermediates or actives that they need, he adds. “Because we doubled the capacity with the acquisition of KemFine, [it] meant that we could shift volume and production to another area – thereby increasing overall capacity, security of supply, improving customer relationships [and so on].”

4. SECURING A DISCREET EXIT

Given these close relationships, exiting the business was a potentially tricky issue. “Running large sell-auctions is not helpful to the business,” Zügel admits. Luckily, Bridgepoint was approached by Permira and the two firms managed to keep the negotiations under the radar. “The only call that happened to the customers was to say: ‘The ownership has changed, but it is business as usual’,” says Zügel.

One of the best things of investing in chemicals is the fact that it offers so many different opportunities, according to Zügel. After all, MCA is used in the food, pharma, industrial, and healthcare industries. “It’s a bit like a tree. You go down one branch and it starts shooting out on each side; it’s becoming larger and larger. You have so many downstream opportunities to expand that you rarely find dead-ends. [Product] businesses will have a limited amount of use – and once you have a big market share, it becomes difficult to go beyond that.”

It is also a good example of how multiple periods of private equity ownership can be beneficial for companies, Zügel argues. “CABB today looks completely different from three four years ago, and I am pretty sure that in three or four years’ time it will look completely different again. It was a great example of the ugly duckling corporate spin-off developing into something quite substantial and sustainable.”