It was 5:30 p.m. on Mar. 29, 2004, and Blackstone Group LLC's two-year quest to take over German chemical maker Celanese hung in the balance. Chinh E. Chu, a senior managing director of the private equity firm, had half an hour to save the $3.8 billion deal. By 6 p.m., Blackstone needed 75% of Celanese shareholders to accept its tender offer. But the tally at 5:30 was just 60%. Unless Chu could round up more shares, the proposed acquisition would collapse and Blackstone would have to eat the estimated $20 million it had spent on bankers, lawyers, and accountants to scrutinize Celanese's books and structure the offer.
The holdout shareholders were hedge funds playing a high-risk game. None wanted the deal to fall through -- that would have caused Celanese shares to plunge. But the hedge fund managers hoped to be among the 25% who withheld their approval. Then, as minority stockholders, they could exploit Germany's arcane takeover law to demand a higher price for their shares. At Blackstone's offices on Park Avenue in New York City, Chu spent a frantic half-hour on the phone. He had to make the holdout hedge funds believe they needed to commit -- now -- or the deal would die. "It was a chess match," recalls Chu.
At 6 p.m., Blackstone had just 71%. But Chu was fairly certain that late computer orders would deliver the winning margin. He was right: When the final tally came in the next day, Blackstone owned 84%. It had pulled off the largest public-to-private buyout in European history.
Not everyone was cheering. In fact, the size of the deal only helped stir controversy months later, when foreign buyout firms such as Blackstone came under attack from the German Left. Critics charged that the outsiders were gutting German industry as they closed down plants, slashed jobs, and added more workers to the nation's growing unemployment rolls. In fact, some private equity deals have turned out badly for workers, feeding public hostility. Most recently, Grohe Group, a maker of high-end plumbing fixtures based in Hemer, Germany, on June 8 announced plans to cut more than a fifth of its 4,300 workers in Germany as it seeks to return to profitability. Grohe is owned by Texas Pacific Group and Credit Suisse First Boston Private Equity (CSR).
Meanwhile, Munich-based MTU Aero Engines, owned by Kohlberg Kravis Roberts & Co., launched a successful initial public offering in Frankfurt on June 6 -- after cutting its German workforce by 10%, to 6,880 since the end of 2003. Franz Müntefering, chairman of the ruling Social Democratic Party, stirred a national debate recently when he called buyout firms "locusts," prompting talk in political circles of curtailing the financiers' activities. And Blackstone? It's among the buyout firms singled out by the IG Metall labor union. "They have money -- lots of money. And they're using it to ransack the German economy," the union said in its in-house magazine.
But a detailed look at the takeover of Celanese, the top global producer of acetic acid, which is used to produce products from plastic bottles to glue, provides a sharply different picture. Plant closings and job cuts? In the year since the deal closed, there have been none in Germany, where the workforce has been stable, at about 3,000 people. In fact, after years of painful cuts before the Blackstone takeover, the total workforce is rising, and Celanese is not threatening to move production to Central Europe. Its highly trained workforce is cost-efficient, says Andreas Pohlmann, who runs European operations. "People are skilled, educated and motivated. That's the strength of German workers."
Blackstone did move Celanese's corporate headquarters last year from the Frankfurt suburb of Kronberg to Dallas, Texas. But that affected only a few management jobs, and public reaction even in Kronberg was mild. One reason is that Celanese already had most of its production in North America; just a third of its 9,000 workers are in Germany. It moved its base to Germany in 1987 after being acquired by German chemical conglomerate Hoechst, which spun Celanese off in 1999.
Critics can rightly claim the payoff for Blackstone in the Celanese deal has been huge. In keeping with buyout practice, it financed the transaction with debt, pushing up the company's total liabilities to $3.4 billion. In addition, Blackstone put in about $650 million but has taken out $500 million in dividends. The firm earned $800 million more by selling shares in Celanese after relisting it on the New York Stock Exchange in January. Its remaining stake is worth $1.6 billion. So the wealthy individuals and institutional investors who supply Blackstone's capital have more than quadrupled their investment.
But Blackstone and Celanese execs argue that without a deep-pocketed backer the company had little chance of remaining independent as the global chemical industry consolidated. Now, with Blackstone's support, Celanese is on the hunt. It's in the process of buying Acetex Corp., based in Vancouver, B.C., which makes chemicals used in paints and adhesives, for $492 million. In February it bought Vinamul Polymers, a maker of chemicals used in textiles, dyes, and paper, for $208 million.
New York equity analyst Fulcrum Global Partners LLC says the company's dominance of key markets, such as acetates, should help profits more than double in 2006, to $307 million, on sales of $6.1 billion. That should make it possible for Celanese to keep making acquisitions, which means greater job security for Celanese workers. Even the company's union is happy that Blackstone, rather than another chemical maker, bought Celanese. "A strategic investor might have taken over the customers and not the production, at least not the German production," says Ralf Becker, a worker representative on the supervisory board. "That would have been worse for the employees."
Workers were less receptive to the notion of a foreign buyout when they first learned of the proposed deal. In February, 2002, Blackstone approached Celanese on behalf of a third party -- General Electric Co. (GE), according to industry sources -- that was interested in Celanese's plastics unit. Later, GE backed out, and Blackstone decided to pursue the purchase on its own. The equity firm was convinced that Celanese was undervalued in a market that was due for a cyclical upswing.
It took nearly two years for then-Celanese CEO Claudio Sonder and Blackstone President and CEO Stephen A. Schwarzman to hammer out a deal. On Dec. 16, 2003, Blackstone offered to pay shareholders an 11% premium on the previous day's closing share price. To protect Celanese's workers, the purchase included $462.5 million to fund the company's pension obligations.
Who are the winners, and who are the losers? If anyone has suffered, it's the relisted company's shareholders. In the six months since the stock was relisted, the shares have been flat. On June 22 they sold for $15.67 in New York, down a smidgen from the $16 initial public offering. The company reported a $10 million loss in the first quarter, largely because of higher interest expenses, though operating earnings rose 61%, to $334 million, and sales rose 21%, to $1.5 billion.
Some minority shareholders, meanwhile, keep attacking management. A New York hedge fund, Paulson & Co., still holds shares listed on the Frankfurt exchange and wants to be bought out for 72 euros, or $88.33 a share. Celanese is offering just 42 euros. Paulson investors and the other remaining German shareholders roundly criticized Celanese management at a meeting in May.
To Celanese executives, the long-term issue is whether the company has the financial might to continue to grow. Analysts are optimistic that Celanese can handle its debt while continuing to make acquisitions -- provided the global economy doesn't tank. "I don't think the debt is a major hindrance. But if we hit a global recession, Celanese could have some trouble," says Frank J. Mitsch, a managing director at Fulcrum.
Among the clear winners are Celanese managers. CEO Sonder retired last year after cashing in an estimated $12.7 million in bonuses and stock options. New Chief Executive David N. Weidman, who has been with the company since 2000, earned $14.7 million last year in salary and bonuses. Pohlmann collected $7.7 million in a country where even CEOs of the biggest companies earn much less. But the biggest winner, hands down, is Blackstone. Backers of the takeover say that's the way it works in capitalism: Rewards flow to those with capital to risk -- and the willingness to risk it.
By Jack Ewing in Frankfurt