CP Kelco off to rocky start
Lehman Brothers Merchant Banking Partners II LP (New York, NY) owns 71% of CP Kelco and Hercules Inc. (Wilmington, DE) owns the remaining 29%. Its launch generated $825 million in debt, including EUR 255 million in 11.875% bonds underwritten by Lehman Brothers in September.
Management has promised to move aggressively to reduce debt and improve cash flow. It also wants to discuss the results with the original sellers of the businesses, Hercules and Pharmacia.
For its part, Hercules says its sale-related actions were "open and completely proper." It also says it may not want to pump additional capital into the business.
Lower than expectations
The company reported third quarter revenues of $112.3 million, and earnings before interest, taxes, depreciation and amortization (EBITDA, before corporate overhead allocations) of $26.8 million.
For the first nine months of the year, the company achieved EBITDA of $99.0 million on sales of $342.0 million.
CP Kelco management terms the results "below expectations." It has begun "a comprehensive review of the circumstances and events leading to the disappointing third quarter performance of both the Kelco and HFG units of CP Kelco."
CP Kelco will undertake the review with auditor Ernst & Young and counsel Simpson Thacher & Bartlett. It plans to explore "potential alternatives to resolve these matters with the sellers of the respective businesses."
Reducing debt
To reduce debt and maximize free cash flow, CP Kelco plans to:
- Seek a contribution of $50 million in new equity from existing shareholders to reduce debt and fund restructuring costs.
- Apply any post-closing working capital or capital expenditure adjustments to debt reduction.
- Consider the sale of the company's San Diego, CA, cogeneration plant.
- Speed up efforts to improve inventory reduction and receivables collection.
CP Kelco estimates these actions will generate about $90 million in cash. Of that, it expects to allocate $70 million to reduce indebtedness.
It will use the balance to fund a comprehensive corporate expense reduction and efficiency improvement plan. The company expects to implement these actions before the end of December 2000. It expects them to generate about $20 million in annual savings in addition to the synergy plan previously presented to lenders.
As of November 17, the company's debt stood at $713 million at current exchange rates. This includes $496 million in multicurrency senior debt and EUR 255 in senior subordinated debt. Cash on hand is about $28 million.
Hercules response
While Hercules SVP/CFO Van Billet expressed disappointment with the results, he urged caution. "While we support several of the steps being taken to strengthen the company, including the sale of certain assets, we have expressed concern that other actions need to be carefully evaluated for their near-term and long-term effects," he states.
He says the company will assess the need for additional capital "in light of all factors, including Hercules' needs to preserve and allocate the use of capital at this time."
"As one of the two companies whose businesses were combined in forming CP Kelco, we are confident that all Hercules actions leading to the sale were open and completely proper," Billet says.
Edited by Alan S. Brown
Managing Editor, Chemical Online
abrown@vertical.net
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