Vista Chemical Company
Vista Chemical Company
Incorporated: October, 1983
Sales: $560 million
Market value: $491 million
Stock Index: New York
Though the history of Vista proper is actually rather brief, its parent company does have a longer history and in fact dates back almost 40 years (a relatively long time in the chemical industry).
On 20 July 1984 a management-led investment team at Conoco Chemicals Company purchased their company’s assets from the Du Pont Corporation which owned Conoco at that time. For almost two years this company (named Vista Chemical Company) remained privately held. In December of 1986 a public offering of the company’s stock finally occurred.
The progenitor of Conoco Chemical Company was the Continental Oil Company (which later became Conoco Inc.). In 1949 Continental converted a refinery it controlled in Baltimore to produce a synthetic detergent, alkylate. This alkylate was the major active ingredient in many industrial and household cleaners. This was Continental’s first venture into the field of chemicals. Several innovative products came out of Continental during the next decades. In the late 1950’s the company developed “the world’s first process for selectively manufacturing linear primary alcohols.” This product is used as a “plasticizer” and also in household detergents. Continental began mass production of this product in 1961 at their plant in Lake Charles, Louisiana. This same year witnessed the completion of a methyl chloride production unit at the same Lake Charles plant, which constituted further product diversification for Continental.
The early 1960’s was a period of growth and innovation for Continental. In 1964 they began production in Baltimore of a detergent alkylate which was biodegradeable, Nalkylene, derived from an earlier biodegradeable detergent developed by the company called LAB (linear alkybenzene).
When Du Pont purchased Conoco in 1981 rumors began to circulate that the former company would sell off some of the latter’s chemical operations. Du Pont’s emphasis was on specialty chemicals and high technology; accordingly, the commodity business of Conoco’s chemical operations constituted a diversification they were not willing to tackle at that time. A group of higher echelon managers from the chemical division of Conoco approached the Du Pont executives with a proposal to buy out the chemical operations in a leveraged buyout. General negotiations surrounding the buyout were friendly: a former Du Pont chairman and member of the board arranged for legal services for the group forming Vista (he was also a member of the law firm eventually involved in the buyout). In addition, Du Pont arranged that all 1200 professionals from the chemical operations could move to Vista or stay with Du Pont in suitable operations.
Du Pont retained several units of Conoco Chemical. The largest of these was a plant in Chocolate Bayou, Texas which produced ethylene, propylene, butadiene, and aromatics. This petrochemical unit was originally a joint venture between Monsanto and Conoco. However, after 1981 it was wholly owned by Du Pont. In addition, Du Pont retained the high density polyethylene unit in Bay City, Texas, the Conoco Drag Reducer business which manufactures agents that increase the flow rate of liquid hydrocarbons in pipe, and the standing interest in Condea Chemie (West Germany). The 50% interest which Du Pont held in Petroquimica Espanola was sold off to the Spanish partner. The remaining chemical operations, out of which Vista was created, were sizeable. The total assets purchased amounted to seven plants in the United States (dealing primarily in detergent additives and polymers), a 50% equity in a manufacturer of alkylates and a 25% equity in a producer of aluminum alkylys, both in Japan, and a 25% interest in a manufacturer of styrene, synthetic rubber, and aromatics in Argentina.
The most notable thing about the buyout is that it was proposed during the worst period of business for the chemical industry since the 1930’s. The chemical industry in the United States was operating at around 64% capacity, and because the Middle East oil producing countries were building chemical plants of their own, the future looked even more forboding. However, studies carried out by the consortium putting up the capital for the buyout indicated that the detergent business was virtually immune to recession. Since the buyout was primarily involved with precisely this business, general industry slowdowns would not affect it. In fact, the studies also showed that even in 1982 (the very worst year) Vista (had it existed at that time) could have kept up on its debt.
The financing of the buyout was rather complicated due to the fact that it involved asset based lending. This meant that the buyout group had to purchase the properties individually (instead of en masse). The E. F. Hutton Group served as financial adviser (and part of the backing group) to the Vista buyout team. Manufacturers Hanover Bank put together a group of seven banks and insurance companies to finance the buyout, and the Prudential insurance company was the major financer of the subordinated debt. Initially the buyout team had a difficult time finding financing for their plans and Gordon Cain (who was Conoco Chemicals’ chief) claimed that two thirds of the banks and insurance companies approached with the plan balked at the idea.
It was not until almost a year after the initial offers were proposed that Du Pont signed a letter of intent with the buyout group. The buyout group was composed of 39 managers from Conoco’s chemicals division.
The chemical division of Conoco Oil Company dates back to the 1930’s when Witco Incorporated, a large chemical concern (then known as Wishnick-Tumpeer Inc.) formed Continental Carbon, in association with the Continental Oil Company (as Conoco was known at that time). Continental Oil held only a 20% interest in the chemical operation (i.e. Continental Carbon) for many years after this. The Shamrock Oil and Gas Corporation held a 30% interest in Continental Carbon and supplied the chemical operation with residue gas which was used for the manufacture of carbon black. This continued until 1958 when Continental Blacks Inc. (which was 58% owned by Continental Oil) was merged with Continental Carbon (which, by that point was 40% owned by Continental Oil) to form Continental Carbon Company. The last mentioned company was 51% owned by Continental Oil after the merger. However, by 1980, one year before the merger with Du Pont, Continental Oil Company owned 80% of Continental Carbon Company.
In 1981 there occured the largest merger in history—Du Pont bought Conoco for 7.8 billion dollars. The giant bought out Conoco in order to protect itself from growing oil prices (Conoco held oil sites in Alaska and Alberta). At the time of the takeover, Conoco Inc. was the ninth largest oil producer in the United States. This was the culmination of a takeover battle that had started one year earlier, when Mobil Oil and the Seagrams conglomerate of Canada were turned down by Conoco in an investment bid. However, during this period Du Pont had accepted a Seagrams investment offer and, as a consequence, Seagrams held 19% of Du Pont stock. As a result of the merger with Conoco, Seagrams actually ended up with 20% of Du Pont stock and obviously, an interst in Conoco. However, according to the agreement between Seagrams and Du Pont, the latter company cannot buy more than a 25% interest in the former until 1991.
After this merger, Du Pont began selling some of its new aquisitions in order to pay off some of the money it had to borrow to aquire Conoco. It was in this context that some of the managers of Conoco offered to buy out the chemical operations from Du Pont.
The first five years of Vista’s operation proved to be profitable. Operating income rose by almost 500% to 90.8 million in 1986; return of shareholder’s equity rose by 100% to 46.6%, and Vista shares rose in value by almost 100% to $30 per share (the average increase in the chemical industry as a whole was only 30%). Perhaps most importantly, the total debt capitalization of Vista was reduced by 25%; after the buyout, approximately 90% of the firm’s total capital was debt—currently that figure is down to 65%. This reduction was made possible by the stock offering which occured in December 1986. Vista sold 4.4 million shares of stock for approximately $70 million, which monies were used to redeem all outstanding special preferred stock and to repay part of its indebtedness. One important benefit of this was that the company was able to renegotiate its bank credit agreements at lower interest rates. According to the new credit schedule, interest rates are connected to the company’s net worth so that as the worth of the company increases, the interest rates will decline.
Vista made its first purchase five years after its birth. In July 1986 a compounding operation based in Kentucky, Premiere Products, was purchased for the purpose of augmenting the company’s line of PVC products. This was followed six months later by the purchase of another compounding production facility, Blane Products, in Massachusetts. This brings the total of Vista’s facilities in the United States to nine.
Vista credits its success over the last five years to its policy of switching to high margin specialty chemical products from low margin-high volume more basic products. This change is evident in both the company’s PVC production and in its surfactant alcohol business (which is necessary for all types of detergent cleaners). Vista has switched from producing low grade PVC which would be used for pipe manufacture to higher quality PVC which would be used in specialty applications, for instance, automobile manufacturing. At the time of the buyout 70% of Vista’s PVC production was pipe grade. In the surfactant field, expansion on the part of Vista has again been in the field of specialty chemicals; for instance, a new customer for Vista in this area is Helene Curtiss a manufacturer of beauty products and shampoos. Since these products require closer attention to quality, Vista formed a department specifically devoted to quality control. This department initiated a company-wide “statistical process control” program.
Vista has not planned major investment in any new plants. When Vista was formed it was one of the top five of 14 PVC producing companies in the United States, and its greatest strength lies in its degree of integration.