Apollo-LyondellBasell Deal Key Lessons
This month marks the 4th anniversary of Apollo completely exiting LyondellBasell, a large chemicals company at a $9.6bn profit (5–6x multiple, see chart above). In my opinion, LyondellBasell deal was one of the best private equity deals ever executed. In fact, I obsessively read about the deal while I was in college and it sparked my interest in private equity.
The details of LyondellBasell deal are readily available. I would mention some of the lessons, all of which have a benefit of hindsight and hindsight is 20/20:
- On Wall Street, other people’s failure may carry the seeds of one’s success. Blavatnik’s deal to merge Basell and Lyondell by paying $19bn for Lyondell, primarily financed by debt, set-up a highly levered MergeCo, LyondellBasell. This formed the seeds of success for Apollo.
- Highly levered deal at the top of the cycle in a cyclical industry is a recipe for failure. As Howard Marks elucidates in his book about market cycles:
“We may never know where we’re going, but we’d better have a good idea where we are…..and act accordingly” — Howard Marks
- In investing, one gets paid for being a contrarian AND putting his money where his mouth is. Post-GFC with LyondellBasell in stress, Apollo kept buying the senior debt of the Company in the 60s, 50s and all the way to the 20s while its creditors were running for the exits. All-in-all, Apollo deployed $2bn, becoming the largest creditor for LyondellBasell and eventually controlling the bankruptcy proceedings
- Creating a deal at a low multiple ensures good downside protection while leaving an opportunity to ride the up-cycle. Apollo’s purchase of LyondellBasell was at an implied creation multiple of approximately half the historical average for similar commodity chemical companies, an impressive feat especially for such a large deal
- Good management and some luck can always sweeten the deal created at low multiples. LyondellBasell was a key beneficiary of the shale revolution in the U.S., given its input costs were significantly reduced. Furthermore, the CEO of LyondellBasell, Jim Gallogly spent capex smartly by adding capacity to existing U.S. plants (short construction timelines) rather than building new capacity which the competitors were pursuing (long construction timelines)
- Lastly, cutting losses early and moving on is the typical strategy taught by star traders but in private investing, doubling down on conviction can be a good strategy. Blavatnik personally invested $2.4bn second time around during LyondellBasell bankruptcy proceedings and generated $8bn of unrealized gains by the time of Apollo’s exit in 2014
Overall, LyondellBasell forms an interesting private equity case study within the ‘loan-to-own’ strategy, and will continue to inspire several generations of investors to come.
