Chemistry lesson: how a native of the USSR cranked the best deal in the history of Wall Street

Leonard Blavatnik invested in LyondellBasell, which had survived a bankruptcy, more than $ 2 billion. How did the American billionaire with Soviet roots earn fantastic $ 8 billion on the deal?
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In November 2013, Apollo Global Management, a famous financial company under the control of billionaire Leon Black, Marc Rowan and Joshua Harris, has closed one of the most lucrative deals in the history of the private equity market.

"Why do you want to buy?"

This is the sale of shares in the petrochemical LyondellBasell. On the implementation of the securities in several stages Apollo shareholders have earned billions of dollars. Reasons to doubt the phenomenal success of the deal they did not have: in all respects LyondellBasell has become a gold mine for investors. This company with its head office in Rotterdam and a major division in Houston, producing products made of plastic and is engaged in refining, in 2008, attracted by Apollo $ 2 billion investment strayed six times:. Income was $ 12 billion The yield Apollo largest fund soared to 30% per annum.. The stunning result, especially given the conditions of post-crisis Wall Street. Apollo quickly climbed into the top private equity industry and held an IPO on the wave of success. Today the company is worth $ 10.5 billion. Its shareholders Harris and Black in 2013, earned $ 397 million and $ 546 million respectively.

"" Against "argument sounds simple: if Apollo sells, why would you buy? - Says in a rare interview with billionaire Forbes. - Prior to the acquisition of each new share LyondellBasell people around tried to convince me that this is a mistake and that I should part with the securities and not to build a package. "

But skeptics were confounded. Since then, as the Blavatnik bought from Apollo last tranche of shares, securities LyondellBasell soared in price by more than 50%. In the history of Wall Street, there are few examples of comparable profitability with this case. After the bankruptcy proceedings of four years ago, investors in the shares of LyondellBasell earned 500% profit. And 57-year-old Blavatnik - deservedly Headsthe first beneficiary of the incredible market spurt. He has been with the company at the time of its creation through the merger of Basell and Lyondell Chemical, he walked with her through the rehabilitation process, he made a risky bet in a moment of uncertainty, personally invested in the assets of US $ 2.37 billion.

Now his investment is estimated at more than $ 10 billion, that is, thanks to LyondellBasell Blavatnik earned $ 8 billion.

According to Forbes, the most lucrative deal in the history of the individual investor.

While news reports Blavatnik name often gets due to his interest in the media (owned by billionaire legendary studio Warner Music and share headphone manufacturer Beats Electronics, bought by Apple), other assets of a businessman on a background of pale LyondellBasell. This Dutch-American company has become a growth driver of his condition. Currently, it is estimated at more than $ 20 billion Blavatnik climbed to 33 th place in the ranking of the richest people in the world -. And it seems to be no limit.

"He cranked the historical operation," - do not hesitate to epithets Managing Director of Nomura Bank Mark Epley private equity division. I agree with him Professor Finaowls Harvard Business School Stuart Gilson: "The deal turned out incredibly reasonable criterion of return for investors. Even more remarkable, it seems, if we recall the conjuncture of 2008: it seemed, was the end of the world, and any risk is tantamount to madness. "

Blavatnik, who through his holding company Access Industries controls 16% LyondellBasell, hoping that the shares of the petrochemical giant has not yet exhausted the potential of growth. "While I am confident in their investment decisions and proud of them, - said the billionaire. - But when luck turns away from me, hard to say. "

Through thorns to the billions

When the investment memorandum of the Dutch manufacturer Basell polypropylene for the first time was in the hands of Blavatnik, businessman drew attention to the number 64 on the first page of the document. This meant that the 63 applicant is already considering the possibility of investment in the company. Why get involved in such a competitive battle? - Discouraged entrepreneurs from the transaction assistants. But the billionaire did not listen - he wanted to build a global petrochemicals business empireAnd Basell represents an ideal springboard for conquering the world.

A native of Ukraine, who grew up in Russia and emigrated to the US in 1978 at 21 years of age, Blavatnik holds an MBA from Harvard, and the first capital amassed on joint projects in the oil industry and the aluminum industry with a former classmate Viktor Vekselberg 3. Its major assets in Russia the share of oil and gas were in TNK-BP, bought "Rosneft" for nearly $ 55 billion, and SUAL, who later became a part of "Rusal" Oleg Deripaska 20. Petrochemicals for billionaires - the first big bet, not connected with Russian partners and the market. In 2005, he bought burdened with $ 4 billion of debt Basell for $ 1.1 billion then -. Tried but failed to buy a number of other chemical companies, including the famous Huntsman International.

Texas Lyondell attracted attention Blavatnik in 2007. The company is not in good financial condition, but had a high quality asset portfolio (plastics production + refineries) and good prospects. He started an investor to buy 8% stake. But in July 2007 he announced his intention to priobresfive control Lyondell for $ 48 per share, a 45 percent premium to the market.

Setting Blavatnik entrepreneur generosity scared. Alan Bigman, 10 years worked in the billionaire's team, recalls jump out of bed at 4:30 in the morning, unable to sleep because of the thoughts about the risks of the transaction. "I know you have already made a decision - he wrote to his employer. - But it seems to me an inflated appraisal. " Owner Access Case Bigman compartment. I do not listen to the criticism he and the other a representative to the Board of Directors of Basell Philip Kassin. Employees can share their dissenting opinions, but ultimately risks businessman "their, not their money," he explains Blavatnik is perseverance.

In December 2007, Basell bought Lyondell for $ 20 billion, including debt. The resulting company has become the third largest independent player in the petrochemical market. But the time for the transaction has been chosen the most unfortunate. A few months later I broke the global crisis - and all hope Blavatnik on the synergy of assets were buried. With leverage over $ 20 billion LyondellBasell quickly sank with the restConomy. The flow of orders from contractors almost dried up, to refineries in Houston as a result of emergency killing four workers and Hurricane Ike knocked out several businesses in Texas. By the end of 2008, LyondellBasell staff fell by almost 2,500 people, or 15%. At the beginning of 2009, Blavatnik ventured into bankruptcy. For him, the move was demeaning. "The request for the financial restructuring of the company - an experience that I had not ever want to repeat. It was really dark episode, "- says the billionaire.

LyondellBasell Bankruptcy has become for him the biggest failure for the entire career of the investor.

The fact that the cost of the failure of the courts to this day argue creditors of the company. Blavatnik has lost at least $ 1.2 billion of its own funds. But not lost faith in the project - he was convinced that LyondellBasell just hit the most adverse circumstances, and can turn into a stable profitable enterprise.

Blavatnik was not the only billionaire who during the crisis awakened appetite for petrochemicals. Apollo also actively attacked the industry, buying the company's sharesd like Hexion Specialty Chemicals and Momentive Performance Materials. All these small players have suffered in 2008-2009 irreparable loss. But Black, Rowan and Harris did not give up and continued to invest in the industry. Even before the bankruptcy of LyondellBasell Harris began buying debt from Citigroup companies at a discount under 80% (ie $ 1 bank debt Apollo costing just 20 US cents). He recalls how Wall Street buzz was about the imminent collapse of the hopes assigned to LyondellBasell. But Apollo chose to trust the internal audit and the results showed: after the collapse of the business in the petrochemical company will go to the mountain.

"Every day we have increased the position in Lyondell, and prices are falling and falling. We acted confidently and buy all the super-cheap - Harris said in an interview with Forbes. - We were able to correctly balance the quality industry expertise with a risk analysis for the business. "

Total spent on the Apollo paper LyondellBasell's $ 2 billion investment and convert to equity in the company during banrotstva procedure. This meant that influential investors to become partners Blavatnik. Harris and Blavatnito - friends, they often spend time together outside of work and socialize families. But that did not stop Apollo, and Access compete for control of the process of financing "debtor in possession", that is on getting new loans after the commencement of bankruptcy proceedings. He won the Apollo. Harris took on the role of LyondellBasell sanitation supervisor and helped to strengthen the company's own position in the petrochemical giant. At LyondellBasell's board of directors includes three representatives of Apollo, who have successfully worked together with a team of Blavatnik. "We have very good relationship with Apollo, - says the founder of Access. - Frictions arose only occasionally, when at the beginning of the business restructuring process, we have different interests. "

Bankruptcy blurred stake in LyondellBasell's a billionaire, but he regained positions through private transactions and off-site, where the company's shares traded. The Blavatnik Board of Directors has delegated its new key adviser Stephen Cooper, who is director general of positions held through financial restructuring Enron Corporation (now Cooper moved in an armchair head Warner Music).

As for de courtLamas of LyondellBasell bankruptcy revealed the main reasons for his sorry state: bad contracts and unprofitable assets, including the closed refineries in Texas and Germany. As a result of the debt arbitration company fell to $ 2.5 billion, and annual payments to creditors decreased by $ 1.7 billion. At the head of the updated LyondellBasell stood ex-CEO of Chevron Phillips Chemical Jim Gellogli. Take a post he accepted in exchange for 1.8 million shares with a restriction and an option to buy another 5.6 million shares for $ 17.61 apiece. "Convince Jim was hard on the negotiations took some time - says Blavatnik. - In the end, we made a very attractive offer. "

In 2010, LyondellBasell has completed bankruptcy proceedings. The company received a score of $ 15 billion. And preparing to take off.

Shale spurt

The Revolution, which breathed new life into LyondellBasell and brought billions Blavatnik and the Apollo, born in thin fractures shale rock, filled with oil and gas. Over the last decade there was a real breakthrough in drilling technology and production of shale hydrocarbons in the United States. fracturing and horizontal methoddrilling have allowed the industry to make a rapid jump in development in the United States. The country suddenly become one of the world's largest manufacturers of cheap energy, the price per million British thermal units collapsed from $ 13 to $ 3-4. This dynamic has served as a catalyst for the revival of dozens of related industries, but none can boast the same results that the chemical. A LyondellBasell's, in turn, became one of the main beneficiaries of the shale boom already in the industry.

Dutch-American company - a leading global manufacturer of ethylene, a raw material for the most common in the world of plastic - polyethylene. This material is used in the production of an infinite number of things, from product packaging to garbage bags and construction helmets. At LyondellBasell has six ethylene plants in the US and four - in Europe. Ethylene and its derivatives - the foundation of the company's business, they generate most of the revenue.

Raw materials for ethylene - ethane, extracted from natural gas and naphtha, crude oil refining product. Poscolku since 2007 shale gas deposits are found in the territory of almost every US state, by 2012 the price of ethane has fallen from 90 to 30 cents per gallon. It gave the US petrochemical companies a huge advantage over their competitors from Europe and Asia tied to the global oil market conditions. LyondellBasell has not failed to take advantage of a gap, quickly gaining momentum and build super profitable business model.

The company fully prepared to meet the beginning of the era of oil shale. In the Midwest from LyondellBasell for decades maintained a near-monopoly position in the processing of hydrocarbons - thanks to the plants in Clinton, Iowa, and Morris. Moreover, the company located in close proximity to a developed infrastructure - pipelines and hub in Kansas, "homeland" of cheap ethane in America. Plants promptly implemented "slate" of innovation - and profit from every pound of production soared to 32 cents, while European competitors barely make ends meet. "No one could fully anticipate the effect of shale pRevolution - says Blavatnik. - But Jim was understanding of the industry and experience in ConocoPhillips, which I think helped him. "

61-year-old Gellogli, a native of the island of Newfoundland and the Canadian lawyer, in a short time has managed to reduce costs by $ 1 billion a year and correctly assessed the prospects for shale boom - soon US production facilities of the company at 90% provides cheap raw materials.

Gellogli strategy fully justified itself. Instead of increasing spending and investment in the construction of new plants, CEO focused all resources on improving the efficiency of existing US businesses. LyondellBasell not only save money - the main asset in the fast growing market proved time that the company, unlike competitors without spending agreement with the regulators and the construction of complex engineering objects and "wrought iron". If other players took six years to build a new plant, the reconstruction plan for Gellogli took only two years.

"You may have heard this expression - likes to say gendireKtorov LyondellBasell. - Who gets up early, God gives. "

In aggregate capital expenditure of the company for three years Gellogli reign reached $ 3.7 billion. The $ 510 million cost the modernization of the cracker factory in Texas Laporte. The project, which is by 800 million pounds to increase ethylene production capacity of the enterprise, must be implemented before the end of 2014. $ 200 million spent for the same purpose at the factory in Texas Chennelvyu. Total cost $ 30 million increase in refinery turned Midwestern states in the performance of 100 million pounds of ethylene and polyethylene.

LyondellBasell's, losing even rose in price to $ 380 million in 2009, in 2013, reported a $ 3.9 billion net profit on revenue of $ 44 billion. The share Gellogli.

For Blavatnik, Apollo and other LyondellBasell owners turned into a machine for printing money. For three years the company has returned to shareholders in the form of dividends and buyback transactions $ 8.4 billion, "It's phenomenal, -. Says Deutsche Bank analyst David Begleyter. - LyondellBasell - a real renaissance symbol of the American chemical industry. "

Industry successes have not gone unnoticed on Wall Street. Shark corporate reyderstva, billionaire financier Dan Loeb spent much of the last quarterly letter to investors of its hedge fund Third Point company Dow Chemical Co. He pushes the management to follow the example of the chemical giant LyondellBasell, whose results still look much better. "In order to understand how much undervalued our business, just look at our North American competitors", - stated the activist-investor in his statement.

The permanent revolution

Although many analysts predict forthcoming sunset shale revolution and a slowdown in the development of related businesses, Blavatnik continues to believe in a better investment. At LyondellBasell invested and other billionaires, including Antony Ressler, David Einhorn, and James Daynana, but they all came out of the asset in the early stages of market spurt, which started after the completion of the bankruptcy proceedings. Harris and Apollo were held longer than the others, as a result of selling the shares at a price of $ 62.65 per share. And in July 2014 the value of securities for the first time over $ 100. It is summed up investors from Apollo flair? Bearing in mind the cyclical nature heenomic industry and being fully satisfied with the return on their investments, they preferred to take the already fabulous profits "monetize" the greatest deal in the company's history. "As an institutional fund, we need to get out of the investment projects and generate income to shareholders - Harris explains. - At that time we were convinced that this moment has come. "

Unlike Blavatnik, working with their savings, the Apollo should return money to outside investors. And the higher the income, the more funds for the following projects will get control. Share of LyondellBasell has allowed Harris and partners to form a new Apollo Fund VIII fund volume of $ 18.4 billion, the largest in the private equity market since the onset of the global crisis. His predecessor Apollo Fund VII participate in the business of petrochemical company provided the rate of return of 15%.

Harris and Blavatnik no more allies: Apollo today is betting on the growth of gas prices. In June, the company for $ 2 billion acquired gas assets and Encana achieves control over bankrupt Energy Future Holdings. This energy company is workingtons of coal and uranium, so it can "shoot" if the predictions come true, and Apollo "gas" competition dramatically lose in profitability.

Blavatnik by alarmist sentiments shrugs. According to him, recent changes in market structure are long-term and in the short term LyondellBasell business does not threaten any shocks.

"Shale revolution continues - sums billionaire. - We see a competitive advantage to stay here a little bit. "

July 25, 2014 LyondellBasell reported a record second-quarter profit of $ 1.17 billion. The company's shares rose to $ 107.5.