Gulf Oil Corp acquires Houghton International
Hinduja Group's lubricants subsidiary Gulf Oil Corp has acquired U.S. based specialty chemicals company Houghton International from a private equity fund for $1.05 billion or 5,714 crore.
The acquired company is nearly four times as big as Gulf Oil in revenues and six times bigger in terms of earnings before interest, taxes, depreciation and amortization (EBITDA). This is the largest acquisition by an Indian company this year and betters Rain Commodities' buyout of Belgium-based speciality chemicals group Ruetgers in a $918-million deal.
The acquisition is expected to offer Gulf Oil a much larger geographical reach and access to new technology and products. Houghton International is the world's biggest supplier of metal finish fluids and industrial lubricants with a 12 percent market share, while its global peers BP Castrol and Quaker have a 7 percent share. "This is a fragmented industry," says Sanjay Hinduja, chairman of Gulf Oil International. "There is tremendous potential for Gulf Houghton."
The financing will be done via a 3-to-1debt-equity structure for which $785 million of loans have already been secured on Houghton's balance sheet at a 6.5-to 6.6-percent interest rate, a senior Hinduja Group official said.
For the remaining $260 million, Gulf Oil International — the parent company of the listed Indian entity — has given a commitment to make available necessary funds to the UK subsidiary, which may be extended by way of debt. More than half a dozen suitors were eyeing Houghton, and the private equity promoter had set a tight deadline that was made more difficult by Hurricane Sandy.
Gulf Oil plans to derive several synergies from the acquisition. Houghton has a presence in the U.S. and Europe, while Gulf Oil has operations in Asia and the Middle East. Also, Gulf Oil is barely present in the product segments dominated by Houghton. Finally, at a combined level, the group would become a large consumer of base oils that could bring down raw material costs.
"We as a group will consume nearly 600,000 tonnes of base oil annually,” said "Frank Rutten, vice president of Gulf Oil International." "This should help us bring down raw material costs by over 2 percentage points."
Although the standalone balance sheet of the listed entity won't be burdened with the additional debt, the consolidated balance sheet would appear highly leveraged, as the business remains under its wholly owned subsidiary.
However, Houghton International, with more than $858 million of turnover and 15-percent EBITDA margins, will be in a position to generate sufficient cash to service the debt. In addition, if the group is able to derive the benefits of synergies at the earliest, it should turn out to be a good acquisition for Gulf Oil.
