IPO Report: Orion Engineered Carbons S.a r.l. (OEC)

Orion Engineered Carbons S.a r.l. (OEC) is a leading global producer of carbon black headquartered in Luxembourg.

10 other companies are scheduled to IPO for the week of July 21, 2014. The full IPO calendar is available at IPOpremium.

The manager and co-managers are Morgan Stanley, Goldman Sachs, UBS Securities. The joing managers are Barclays, J.P. Morgan, KeyBanc Capital Markets, Macquarie Capital.

OEC scheduled a $315 million IPO with a market capitalization of $1.3 billion at a price range midpoint of $22.50 for Friday, July 25, 2014 on the NYSE.  SEC filings

OEC IPO Overview

OEC is a leading global producer of carbon black. Carbon black is a form of carbon used to improve certain properties of materials into which it is added.

Highlights

.  100% to selling shareholders

.  25 times annualized Q1 '14 pro forma earnings

.  One of the three largest in the industry

.  Recent leveraged buyout, plans to pay dividends but amount not set

OEC's Valuation

Glossary

OEC Conclusion

The rating is neutral plus. May have to be priced down.

OEC Business

OEC is a leading global producer of carbon black.

Carbon black is a form of carbon used to improve certain properties of materials into which it is added.

 It is used as a pigment and as a performance additive in coatings, polymers, printing and special applications (specialty carbon black) and in the reinforcement of rubber in tires and mechanical rubber goods (rubber carbon black).

Leveraged Buyout

Historically, OEC’s business operated as a business line of Evonik and was acquired from Evonik on July 29, 2011 (the “Acquisition”) by investment funds managed by affiliates of Rhône Capital L.L.C. (the “Rhône Investors”) and investment funds managed directly or indirectly by Triton Managers III Limited and TFF III Limited (the “Triton Investors”). Prior to the Acquisition, the Company had no operations.

OEC operates a diversified carbon black business with more than 280 specialty carbon black grades and approximately 80 rubber carbon black grades. OEC’s product portfolio is one of the broadest in the industry and is divided into the following segments:

One of the Three Largest

Specialty Carbon Black. OEC is one of the largest global producers of specialty carbon black with an estimated share of global industry sales of approximately 23% in 2013 measured by volume in kmt.

OEC believes that its share of global industry sales measured by revenue is higher, since its product portfolio is weighted towards higher priced premium grades.

OEC manufactures specialty carbon black at multiple sites for a broad range of specialized applications.

Specialty carbon black imparts specific characteristics, such as high-quality pigmentation, ultraviolet (“UV”) light protection, viscosity control and electrical conductivity.

Financial Summary

In 2013 and the three months ended March 31, 2014, OEC generated revenue of €1,339.6 million and €330.5 million on sales volume of 968.3 kilo metric tons (“kmt”) and 249.3 kmt, respectively,

Adjusted EBITDA of €191.1 million and €50.0 million, respectively, and a loss for the periods of €19.0 million and €0.4 million, respectively.

In 2013 and the three months ended March 31, 2014, Adjusted EBITDA for OEC’s Specialty Carbon Black segment was €98.0 million and €25.7 million, respectively, and the Segment  Adjusted EBITDA Margin was 25.1% and 25.2%, respectively.

This segment accounted for 29.1% and 30.9% of OEC’s total revenue, 51.3% and 51.4% of its total Adjusted EBITDA and 19.7% and 20.4% of its sales volume in kmt in 2013 and the three months ended March 31, 2014, respectively.

Rubber Carbon Black. OEC is one of the largest global producers of rubber carbon black.

OEC has a global supply network and an estimated share of global industry sales of approximately 7% in 2013 measured by volume in kmt, with industry sales shares by volume equal to or exceeding 17% in each of its major operating regions.

In 2013 and the three months ended March 31, 2014, Adjusted EBITDA for OEC’s Rubber Carbon Black segment was €93.2 million and €24.3 million, respectively, and Segment Adjusted EBITDA Margin was 9.8% and 10.6%, respectively.

This segment accounted for 70.9% and 69.1% of OEC’s total revenue, 48.7% and 48.6% of its total Adjusted EBITDA and 80.3% and 79.6% of its total sales volume in kmt in 2013 and the three months ended March 31, 2014, respectively.

OEC Dividend Policy

OEC currently intends to pay regular annual dividends on its common shares after the completion of this offering, beginning in 2015 in respect of the portion of 2014 following its change in legal form to a Luxembourg joint stock corporation in connection with this offering. The amount of any future dividend has not been determined.

Intellectual Property

In connection with the separation of OEC’s business from Evonik, Evonik assigned to OEC’s intellectual property that was exclusively used in its carbon black business, as well as certain intellectual property rights that are still in use in its retained business.

Evonik retained ownership of certain intellectual property that is not material to us. Evonik has granted OEC a non-exclusive license to use such retained intellectual property in the field of carbon black.

In addition, OEC has granted back to Evonik licenses relating to some of its intellectual property rights to use such intellectual property in all fields outside of carbon black, which licenses are, subject to certain exceptions in areas adjacent to carbon black, exclusive.

Accordingly, OEC may be restricted in leveraging its intellectual property that it uses on the basis of a license from Evonik or the intellectual property that is subject to the grant-back license to expand its business into fields outside of carbon black.

OEC Competition

OEC is one of the largest global producers of specialty carbon black with an estimated share of global industry sales of approximately 23% measured by volume in kmt in 2013.

OEC believes that its share of global industry sales measured by revenue is significantly higher, since its product portfolio is weighted towards the higher priced premium segment of the specialty carbon black market.

Cabot and Birla were the other two large global producers of specialty carbon black with shares of global industry sales of approximately 23% and 17%, respectively, in 2013 based on volume (Source: Orion internal study with AT Kearney).

All top three producers of specialty carbon black use their R&D and applications technology platforms to tailor products to customer needs and to introduce their products into new application niches.

5% Stockholders

Kinove Holdings, 90%

Luxco Coinvest, 10%

Use of Proceeds

OEC intends to use the proceeds from its IPO as follows:

The Selling Shareholder will receive all of the net proceeds from this offering. OEC understands that Kinove Holdings intends to use the net proceeds from its sale of common shares in this offering, together with the funds it receives from OEC on the discharge of the PECs in the Refinancing and its own available cash, to repay in full the principal amount of its outstanding PIK Toggle Notes due 2019, at the closing of this offering.

The PIK Toggle Notes due 2019 were issued in January 2013 by a subsidiary of Kinove Holdings that is not part of the Group, have an outstanding principal amount of approximately $425 million and bear interest at an annual rate of 9.250%/10.000%, which is payable in cash or in kind by increasing the principal amount.

OEC further understands that Kinove Holdings intends to distribute the remaining net proceeds from this offering to the Principal Shareholders and the ADIA Investor. OEC will not receive any of the proceeds from the sale of common shares in this offering.