IP CHALLENGES -...

alchemistthe

Clearwater’s half-year chemicals sector commentary Winter 2013/14

InterviewSynthomer CEO Adrian Whitfield

Global viewIMAP partners share their thoughts

German outlookKey M&A trends

PE focusRiverside Europe Partners

IP CHALLENGES Strategies for maximising IP value

GLOBALCHEMICALSDEALS

+

Just how do you maximise the value ofyour Intellectual Property (IP)? Well, it’s aquestion that is becoming ever moresignificant as the speed of innovation andtechnological change turns corporateventuring mainstream.

One option is to create value by breakingup different parts of your business. Aschemicals entrepreneur Paul Smith tellsus, investors will often decide to split thebusiness into a part that buyer A wants sothat it can then sell the other to buyer B.

But to maximise value it is not enough tosimply invent something that works, it’salso about developing a significantamount of proof that it works. Ultimatelycorporates aren’t just looking for robustpatent coverage, but technology which isproven commercially and which does whatit says on the tin.

The latter point is made by Rob Wyliefrom cleantech fund WHEB, who says thatfor large companies it doesn’t reallymatter whether your business is turning

“You should be constantly looking atwhether you are creating value for a singlebuyer or if you ultimately have multiplebuyers in mind,” he says. Given the cashconstraints that early-stage chemicalsbusinesses are invariably dealing with,splitting up your IP offering can also be thesmart thing to do financially.

over £1m, £5m or £10m. “What mattersis what they can do with the technologyand how they will be able to grow theirbusiness with it.”

Sometimes to maximise value calls for acomplete rethink of business strategy. Thepoint is perfectly illustrated with our case

the alchemist | Winter 2013/14

2welcome

A warm welcome to this latest issue of the alchemist,Clearwater’s bi-annual commentary on the chemicals sector.

Welcome

“To maximise value it is not enough to simply inventsomething that works, it's also about developing asignificant amount of proof that it works.”

study of agrochemical business Exosect(see page 11) which decided to scaleback its sales function in order to invest inR&D and a licensing approach. In so doing,the company became a potential partnerfor the big players in its industry ratherthan a competitor.

Talking of turning a business around, we arealso delighted in this issue to carry aninterview with Synthomer CEO andChemical Industry Association President,Adrian Whitfield. Adrian discusses how amajor restructuring of Synthomer, formerlyYule Catto, is now paying handsomedividends as it seeks to expand its reachglobally, particularly into the Far East.

Constantine BillerPartner

The alchemist is published by Clearwater InternationalEditors: Jim Pendrill and Sarah FernandezDesign: www.creative-bridge.comSubscription: [email protected] part of this publication may be reproduced orused in any form without prior permission ofClearwater International

3contents


4deals

Contents

f

5featuref

8interviewf

10IP focus

f

12IMAPf

14PE focusf

Meet the teamConstantine BillerPartner

+44 (0)845 052 [email protected]

Philip NuttallPartner


Nick HorrocksDirector


Jorge GrandeIndustry Advisor


Martyn TwiggIndustry Advisor


James HalesDeal Origination


Julie BrownAnalyst

+44(0)845 052 [email protected]

4deals

Iberchem SA

Iberian private equity firm Magnum Capitalhas acquired a majority stake in Iberchem, aSpanish fragrances and flavours producer,from Capital Alianza.

Capital Alianza originally acquired a majoritystake in the business in 2008, a deal whichsaw then investors Espiga Capital andInverMurcia exit the firm. Back in 2002they had funded the opening of a factoryin Murcia, Spain, as well as the acquisitionof a Chinese plant.

Magnum offered around ¤80m for thebusiness, 8x EBITDA, and now plans togrow the firm through the consolidation ofits position in China, Indonesia and theMiddle East. The firm, which hasproduction facilities in Malaysia, India, Italy,Tunisia, Colombia and Mexico, also plans toenter other emerging markets. Iberchemhad revenues of ¤57m in 2012 and morethan 90% came from overseas.

Magnum has been one of the most activeIberian investors in recent years havingmade seven investments since 2007. Thefirm generally targets equity investments

between ¤50-150m. Among its portfolioare wind energy company Iberwind; civilengineering business Eptisa; and genericpharmaceuticals firm Generis.

Zaklady Chemiczne Alwernia

The Ciech Chemical Group has sold itsAlwernia chemical plant in Poland toAlwernia Invest as part of an ongoingrestructuring and divestment programme.

Alwernia Invest (Poland) is part of theKermas investment corporation whoseprimary focus has traditionally been miningand mineral processing activities, but whichhas recently begun diversifying into othersectors such as renewable energy, realestate, marina development, agricultureand shipbuilding. The deal was valued atapproximately PLN 55m.

The Alwernia plant manufacturesphosphorus and chromium as well asagricultural fertilizers. Its products aremainly used in the production ofdetergents and in the food and meatindustries, as well as in the production ofpaints and varnishes.

Our colleagues around the world have hadanother busy half year in the chemicals sector.

Deals digest


Ciech remains a leading European chemicalmarket player with operations acrossPoland, Europe and Asia. The group’sproducts include soda ash, baking soda,salt, fertilisers, plant protection chemicals,epoxy and polyester resins and otherorganic chemical products used in theglassmaking, furniture, chemical,construction and agricultural industries.

Cofarcas SA

Quimitécnica, the Portugese companyinvolved in the marketing and distributionof a wide range of chemical products, hasacquired Cofarcas, a Spanish distributor ofindustrial and laboratory chemicals. Thepreviously family-owned business,headquartered in Burgos, is also a specialistin food additives and water treatment.

The deal strengthens Quimitécnica’sposition in the Spanish market whilemarking a further step in its globalexpansion strategy. The company also hasa commercial presence in Morocco, Egypt,Angola and Algeria. Financial details of thetransaction were not disclosed.

5feature

The rationale for corporate venturing and accessinggame-changing IP gets ever stronger. So what is thekey to maximising IP value?

Maximising value

The speed of innovation and technologicalchange today, coupled with the difficulty ofraising Venture Capital (VC) funds and anever-increasing regulatory environment, hasturned corporate venturing mainstream.

As Dr Rob Wylie, co-founder of WHEB,which set up the UK's first cleantechventure fund in 2004, says: “Ten years agocorporates really didn’t know how toapproach this whole area. There was also

an undercurrent of mistrust with the VCindustry which questioned whethercompanies were trying to buy assets onthe cheap.”

Today corporates have moved into a spacevacated by many VCs. Adds Wylie: “It isalmost impossible to raise venture fundsright now, so there has been a big lack ofVC money going into early stagebusinesses. That creates room.”

A particularly strong focus of corporateventuring activity in recent years has beenin clean technologies, as a growing globalpopulation puts ever greater strain onenergy resources.

Paul Smith, a successful entrepreneur inthe chemicals sector with experience ofcreating value for VC and PE investors,says more and more corporates arerealising that they could be missing a trick.

The maintenance of product performanceat improved cost is another keycomponent. “Companies want to becomeever more productive and efficient so theycan pass on cost reductions to consumers.If you can hit upon a solution that reducesyour manufacturing cost by 10%, then thatis a game-changer,” adds Smith.

However, identifying a potential marriagebetween the corporate and the start-up isonly one part of the story. As Smithcontinues: “For a start-up to persuade thecorporate to deploy the necessaryresources to fully support their technologycan still be difficult. There can be enormousoperational inertia within big corporateswhich are complex, matrix managedorganisations with many levels of approval.”

Smith says the key is for corporates to havea mindset that innovation created outsidetheir business is truly worth investing in.“They need to be structurally organised andhave people whose sole job is to look fortechnology of value. Corporates usuallycome at corporate venturing with aparticular problem to solve, and it’s theSMEs who have the solutions.”

Different corporate venturing strategieshave begun to emerge in this new climate.

“It’s about having that window on thepipeline. The big guys want to use a VCarm to scout for technology that theymight use in five years time.”

Smith singles out the regulatoryenvironment as a driver. “If you can prove that your product has the potentialto help meet current and future legislativerequirements, then you are in a very good position.”


“It’s about having that window on the pipeline. The big guys want to use a VC arm to scout fortechnology that they might use in five years time.”Paul Smith

Smith says some corporates continue toonly look for technologies which theyspecifically think they can use, while otherstake a more holistic view and are happy toback technologies which may or may notultimately have relevance to them. Somecorporates also invest in specific VC houseswhich are active in their field.

Wylie says another trend is the growth ofmulti-corporate investor businesses suchas Aster Capital which works with Alstom,Schneider Electric and Solvay on earlystage energy and environmentaltechnologies. Schneider Electric sponsoredAster’s first fund in 2003, with Alstom andSolvay joining the syndicate in 2010.

For SMEs it isn’t just a case of deciding whichcorporate partner to choose. They also haveto think about their own IP and how it can bebest maximised to create value.

Adds Smith: “For SME’s it comes down topersistence. They have to be able to sell whatthey have in a way that will bring financialgain.” He says one option is to create value bybreaking up different parts of the business.“Investors will often decide to split thebusiness into a part that buyer A really wantsso that it can sell the other to buyer B. Youshould be constantly looking at whether youare creating value for a single buyer or if youultimately have multiple buyers in mind.”

Wylie echoes the point. “Corporates arelooking for robust patent coverage but alsotechnology which is proven commercially. Itneeds to do what it says on the tin. Forlarge companies it doesn’t frankly matterwhether your business is turning over £1m,£5m or £10m. What matters is what theycan do with the technology and how theywill be able to grow their business with yourtechnology. Some SMEs get caught intothis trap that sales are everything.”


6feature

What is your current investmentapproach?

Venture Capital investments provide uswith an additional option to driveinnovation for our company andbusinesses. Dow has been investing instart-ups for more than 20 years and weare a strategic investor that is constantlyupgrading its investment approach basedon key trends that impact us.

How do you choose opportunities?

We consider the team, the marketopportunity and the solution proposed.We focus on opportunities that arealigned to Dow’s preferred marketswhere we have strong incumbenciesand leadership positions. Once thoseparticular opportunities are identified,we work hand-in-hand with ourbusinesses to ensure the objectives ofboth parties can be achieved in theenvisaged relationship structure.

What can Dow bring to the table?

Dow has a unique global reach, scale andtechnology portfolio and capabilities. Wecan help companies enter markets andgeographies which might otherwise be achallenge. We can also give them a way-in to relevant industry organisationsthrough our own network and point outwhat they might need to be thinkingabout. We can evaluate their offeringand accelerate their development. Wenormally take minority investmentsduring the exploration phase and thendetermine our further engagement once

we fully understand the mutual benefitsthe opportunity can create.

Why do you think corporateventuring is on the rise?

It comes down to the speed andcomplexity of innovation today.Customers expect constantly bettersolutions that raise the bar and requirecombining different sciences to meetthese needs. In this environmentcompanies recognise that they cannotinvent everything themselves, even intheir own specific segment. Thisincreasing recognition has coincidedwith financial VCs having a much hardertime raising funds.

What sectors should we be keepinga close eye on?

The whole nexus around water, energyand agriculture poses huge challengesand opportunities. Put simply, youcannot have clean water without energyand you cannot produce energy withoutclean water. With an ever-increasingnumber of megacities across the world,access to clean water becomes moreand more pressing. How do you treat it?How do you purify it? How do you treatwastewater? Another key trend is theincreasing crossover of technologies intodifferent sectors. For instance, we haveseen this in the pharmaceutical, lifesciences and industrial markets.

Mark Felix, InvestmentManager at Dow VentureCapital, discusses his approachto corporate venturing.

American entrepreneur Bruce Moeller isCEO of US-based AquaSpy which hasdeveloped a range of sensors, telemetryand software systems for the waterindustry. He says that splitting up your IPoffering can often be the smart thing todo, particularly given the cash constraintsthat start-ups always face.

“This is often where companies get itwrong and I have seen it. It can get soheady when things are going right andpeople think growth will always come in alinear progression. The danger is that youoverextend yourself and run out of moneybefore you have realised some value. Itcomes down to a mix of leadership, visionand boldness. You have to walk the razor’sedge, tempering your enthusiasm withrealism. Someone has to be there saying‘let’s get this thing profitable first’.”

Moeller says AquaSpy itself had many“near-death” experiences. “We have beenthrough some tight spots but when youget it wrong you have to adjust quickly.The key moment for us was when I realisedthat the technology would only work andbe of value if it applied to one specificmarket at a time, rather than trying to beall things to all people. We decided we hadto pick a particular geography and focus ona particular market segment which turnedout to be agriculture.”

Last year Moeller’s strategy was vindicated when the company signed afive-year distribution agreement withValmont Industries.

Clearwater partner Philip Nuttall says SMEswith differentiating IP would do well tolearn from the experiences of Moeller,Wylie and Smith. "Value can be created andlost by adopting the wrong strategy at thecrucial moment," he adds.

7feature


What was the background to thenew unit?

We plan to invest up to ¤100m over themedium term in start-ups and specialistventure capital funds, focusing onEurope, the US and Asia. It will provide uswith access to innovative start-upcompanies with disruptive technologiesin new materials and specialty chemicals.These investments enable rapid accessto totally new technologies inside andoutside of the existing portfolio.

What sectors are you targeting?

Our investments will be orientedtowards resource efficiency, health,nutrition and advanced materials. Wewant to be a reliable partner for ourventure investments and support theirsuccessful growth not only financially,but also with technical expertise andstrategic insight.

How does the team link to yourOpen Innovation programmes, R&Dand business divisions?

The goal of our innovation activities is tomaintain and expand our hightechnological competence over the longrun. Corporate venturing ideallysupplements our existing innovationprocesses and structures, and helps createexcellent opportunities for accelerating thedevelopment of new businesses.

Will the unit be working closelywith other VC firms?

Yes. Syndication and partnering withother VC firms, institutional or strategic,is a very important element of ourinvestment strategy. These partnershipsenable rapid access to totally newtechnologies outside of the existingportfolio. We have made three fundinvestments in the German High-TechGründerfonds II; the Emerald CleantechFund III with focus on Europe and NorthAmerica; and the North AmericanPangaea Ventures Fund III. Most recentlywe completed our first directinvestment where we led a syndicatethat comprised of several top tierinternational VC firms.

How is the team made up?

Although we are a strategic investor weexpect to deliver risk-adjusted venturecapital returns. To achieve both targets,strategic and financial, we have formeda team of seasoned experts with alongstanding expertise and reputation,both in the chemical and VC industry.Half of the team has many years ofrelevant and valuable VC experience,while the other have had long careers inEvonik with expertise in technology,marketing and business functions.

Dr Bernhard Mohr, Head ofCorporate Venturing atspecialty chemicals giantEvonik, on the firm’s newcorporate venturing division.


Having overseen a major restructuring of the business,Synthomer CEO Adrian Whitfield is now busy cementing itsglobal reputation.

Global forces8interview

Whether it’s the sustainability agenda,technological advances or demographicchanges, there are no shortage of globalforces underpinning growth at Synthomer,the speciality emulsion polymers supplier.

However, as chief executive AdrianWhitfield tells us, it's the continued globalregulatory drive to water rather thansolvent-based chemical platforms that isthe most signficant driver of all, and onewhich is today as prevalent in emergingmarkets as it is in Europe and the US.

That drive was epitomised by the decisiontaken just over a year ago to change

For Whitfield, who took over the reins ofthe business in 2006, the symbolic namechange also marked the completion of amajor restructuring and turnaround of thebusiness which at the time was heavilygeared. “Back then we took the consciousdecision to turn the business into anaqueous polymer company because wecould see the way the regulatory andsustainability winds were blowing. At thetime we had a very diversified portfolio andwe completely reset the strategy, divestingbusinesses which were underperformingand restructuring others.”

Synthomer's name from Yule Catto, tomark its transformation from a holdingcompany for a disparate group of chemicalbusinesses to a focused speciality aqueouspolymer producer supplying the coatings,construction, textiles, paper and latexgloves markets.

Eight years on, and having traded throughthe financial crash, the success of theturnaround is for all to see in Synthomer'sfinancial performance. Since 2006revenues have doubled to morethan £1.1bn with EBIT of£109m for the last year.

“We traded through the crash precisely because ofthe changes we made to the business between 2006and 2008.”

Whitfield admits that if the company hadn’tlaid the groundwork for the restructuringbefore the crash then it could have been adifferent story. “We traded through thecrash precisely because of the changes wemade to the business between 2006 and2008. It was fortuitous to a degree that wehad implemented the turnaround when wedid. In particular, we sold four businessesjust before the crash and that made a bigdifference in terms of being able to paydown our debt.”

He adds that the company was also aidedby the fact that competitors were busyrestructuring too, as the economicenvironment called for a step-change inthinking. “Every company had to ask itself‘what do I have to do differently’. In thatsense I don’t think our situation was unique.”


share of the global market increasing to66%. By contrast, between 2010 and2030 the European share of the market isforecast to fall from 25% to 15% (ATKearney Chemical Industry Vision 2030).

“Asia is the powerhouse driving demandfor chemicals,” says Whitfield, whohighlights that the company now wants tobuild up its Chinese operations inparticular. “We are open to makingacquisitions in China and investing ingreenfield assets, and our preference is touse our own IP wherever possible. Asia isa real growth opportunity for us, thedirection of travel is clear.”

The Middle East is another “very attractive”market which continues to grow strongly,he adds. Last year Synthomer announcedplans to expand its polymer dispersion plantin Dammam, Saudi Arabia, increasing plantcapacity to over 100,000 tonnes.

The company's focus on Asia and emergingeconomies is all the more important giventhe challenges of the European market. Withmore than half of revenues still coming fromthe continent, the market naturally remainscore to the business. “Europe will always bevery, very important to us and is our engineroom. It is where we develop the majority ofour IP and the majority of our large scalecustomer relationships,” says Whitfield.However he admits that in an environmentof weakened demand it is difficult tooutperform the market right now.

Meanwhile despite the shale gas boom inthe US, Whitfield is adamant that thethreat from products being shipped acrossthe Atlantic to Europe is minimal due to

the high water content of theproducts. “The logistics

costs of shipping water

rapidly outweigh any advantage due to shale gas.”

Whitfield believes that Synthomer'sstrong focus on serving regional marketsputs it in a strong position. “For us it is allabout IP, expertise and customerrelationships. It is not about shippingproducts from one side of the world toanother, and I don't see this as a viablemodel in our sector.”

Meanwhile, he stresses that innovationremains the lifeblood of the business. “Ourproduct range has to be based on globalmegatrends and our own strengths. Wewill continue to develop and support abroad range of aqueous and otherpolymer technologies.”

Finding the innovators to drive thatinnovation naturally remains key. “We areconstantly looking for people with acertain mindset, a certain mentality toinnovate and a state of mind which says‘would it be a good idea to try and do itthis way'. By definition, innovation is thebiggest driver of our business. What doour customers want in three or five yearstime and how do we best deliver that?”

9interview

Adrian Whitfield has been CEO ofSynthomer, previously known asYule Catto, since 2006. He is aformer Chief Executive of theplastics division of DS Smith andVice President of the Europeanoperations of Crown Simplimatic.Last year he was electedPresident of the UK chemicalindustry trade body, theChemical Industries Association.

CV

Whitfield recalls that the biggest questionthe company faced was simply decidingwhat it wanted to be. “It was aboutputting more focus on who our customerswere, how we approached the market,and identifying our value proposition. Wethought long and hard about who wewere, what we did and what customerswanted from us.”

With the restructuring complete and theworst of the downturn over, Synthomer hasspent the last few years further capitalisingon these global forces in its industry,especially in terms of extending its footprintinto new geographies, most notably Asia.

Whitfield says the strategy is to capitaliseon the company's strong position inEurope and to drive growth in emergingmarkets. “It's about reinvesting ourEuropean know-how, market profile andcashflow to drive overall growth rates,about leveraging our European IP. At thesame time it's also about continuallyinvesting in innovation to drive growth andefficiency through new products andprocesses, and developing environmentallysustainable products and processes.”

Given the dynamics of the Far Eastmarket it is little wonder that the region issuch a focus. Chemical sales in Asia areforecast to top $3tn by 2030, with Asia’s


10IP focus

Intellectual Property Rights are of critical importance in thechemical sector. Jennifer Delaney and Bob Pidgeon frompatent attorneys Appleyard Lees tell us how companies canmaximise their value.

Knowing your rights

How can companies maximise their IP?

Businesses need to have a clear IntellectualProperty Rights (IPR) strategy and first andforemost ensure they capture theirinnovations. From that base they can thenmake rational decisions about what form ofIPR is appropriate and how vigorously toproceed. But companies should not obsessover the legal prospects. All businessesneed to identify innovations which inprinciple could become value-generatingassets, decide how exclusivity is bestachieved and then act effectively.

What IPRs are most important inrealising value in the chemical sector?

The sector uses a range of IP strategies. Atone end is pharma chemistry where patentsrule, while at the other are areas such asprocess innovations, and flavour and aromachemistry. Here, patents are of littleimportance and the goal may be to simplykeep innovations confidential. Manychemical businesses follow a middle course.

How do you find the best approach?

The first step is to ensure that innovationsare identified reliably, then decide whetherpatent protection should be sought. Whatare the patent prospects? What is the widerbusiness context? Is the innovation

potentially highly valuable and in a key areaof the company’s business? Is the innovationsecondary or speculative and in a low-valuebusiness area? Can you patent theinnovation whilst keeping some informationconfidential? Is the technology licensable?

What part does value creation play?

A big part, both when we first learn aboutan innovation and at all later stages. Forsome companies the role of IPRs in creatingvalue may be clear at an early stage. Forexample, many biotech companies have alicensing-out business model and they needgood R&D to create licensable patentswhich then generate an early revenue flow.University spin-outs often raise investmentcapital underpinned by their early patentholdings. The time between IPR creation andinflow of licensing revenue investmentcapital may not be very long.

What if it is harder to value?

We build the IPR position piece by piece andthe parts of highest value will become clearonly later. At the early stages we can talkabout prospects, but cannot meaningfullymeasure value. Only later on can value bemeasured in the usual ways, with referenceto tangible financial benefits such as highmargins achieved due to maintenance of

exclusivity or royalty streams fromlicensing. Corporate behaviour can also beimportant in determining whether a patentadds value. Some chemical corporations areultra assertive and their patents, good orbad, tend to survive and have valuebecause they are never challenged.

Does the IPR have to be ‘good’ for it tobe important in realising value?

Patents, confidential information and otherIPRs exist for a commercial reason. Anarrow patent with some legal deficiencieswould not normally be considered a ‘good’patent, but if it protects a key product andhelps to maintain a high margin, in our viewit is. On the other hand, an excellentlywritten patent with broad scope but nocommercial prospects should probably beregarded as a failure.

What can be the impact when acorporation owns a raft of patents?

This is sometimes called a ‘patent thicket’and the patents can have a value in excessof their individual worth becausecollectively they are so difficult andexpensive to handle. A patent thicket mayrepresent an imposing hurdle forcompetitors and act as an effectivecommercial barrier to market entry.


Just how do start-ups go aboutmaximising the value of their IP? We spoke to two companies in theWHEB Partners portfolio to find out.

Steritrox

Like so many spin-outs, the Steritrox story hasrather obscure beginnings. As director MarkFielding explains, the original technology cameout of the government’s military base atPorton Down through investigations into whathappens during and after thunderstorms.

“What they found was that the old wives’tale rang true, namely that air is far cleanerafter a thunderstorm. A few scientists thenrealised that the science they were lookingat could have a commercial application.”

Using these scientific principles, Steritrox hassince gone on to develop a computercontrolled device that can be used toeliminate all major problem bacteria fromfood production areas such as storagechillers, warehouses and transport containers.The technology uses a combination of ozonegas, humidity and free radical cascade toincrease the effectiveness of ozone gas.

Because the technology sanitises allsurfaces, it can also be used in the medicalindustry to help kill pathogens such asListeria, E.coli and MRSA. So Steritrox hasalso developed, with Johnson Matthey,devices for use in hospitals.

Fielding says to be successful it is notenough just to invent something thatworks. “You have to develop a significantburden of proof that it works. So for us itwas about demonstrating that our productworks in food processing factories, worksin real hospitals. You have to support thescience and give yourself a selling story.One of the big challenges we faced in theearly days was persuading people that theproducts would actually work.”

Once their product was proven in the foodindustry, Steritrox began approaching

potential investors with WHEB. In 2012 atechnology license agreement was struckwith Dow Microbial Control, a business unitof the Dow Chemical Company, under whichDow has exclusive rights to Steritrox wholeroom decontamination technologies for usein all non-medical applications worldwide.

Because it is a licencing deal, it means thatSteritrox has kept its patents to furtherdevelop its medical business. Adds Fielding:“The process is essentially the same in bothindustries, so from an IP point of view weneeded to retain all the IP. On the medicalside the potential to scale up volumes issignificant and the market is huge,particularly because hospital infectionsremain such a big problem.”

Exosect

Technology enabling business Exosect is aperfect example of a start-up which founditself having to completely changedirection in order to fully realise the valueof its IP, without endangering its future.

The company, a spin-out from theUniversity of Southampton, has over thelast decade been developing platforms forcrop protection and insect control acrossthe entire food chain, providing alternativesto increasingly ineffective and heavilyregulated synthetic pest control methods.

CEO Martin Brown, an agrichemist by trade,has been with the business since WHEB firstinvested in the company in 2004. At thetime, many ‘green’ tech companies hadbegun looking at using alternative systems tohelp reduce the use of sprays as part of theirpest management strategy.

Between 2004 and 2011 the companytrialled its technology in various high-valuecrops, but Brown says over time the adoptionrate began slowing as other manufacturerspiled into the market. “Despite more VCpartners coming on board, we were burningcash on sales and marketing. We realised that

we couldn’t take on the big boys because wecould never get the leverage that we needed.

“It called for a radical rethink and we havenow completely changed our strategy. Wescaled our sales function right back andinvested in R&D and a licencing approach.Overnight we became a potential partnerfor the big boys instead of a competitor,offering them solutions to their problems.”

Brown says such a model has little valueunless you fully protect your IP. “Maintainingand developing our patent family is key, andwe now have 15 patent families and morethan 60 patents granted and a similarnumber pending. The pesticide market isvalued at more than $40bn per annum andthe opportunities are significant.”

He adds that because the company runs itsIP as a platform, the beauty of the Exosectmodel is that it can also transfer quiteseamlessly into other sectors such as publichealth and animal health. “This also spreadsthe risk for investors,” he adds.

Brown says the next 12 months will beabsolutely crucial to the company’sdevelopment. “We have to build valuefurther, either at the revenue level or interms of licensing.”

11IP focus

12IMAP

IMAP partners share their thoughts on the year ahead.

Global view


Simon Zhang, IMAP China

The full consequences of theCommunist Party’s third plenum in late 2013, which called for the market to play a more “decisive” role in allocating resources, remain to beseen. But what is clear as we head into 2014 is that China’s public sectorand its state-owned enterprises(SOEs) are set to face ever greater market competition.

While we are on the brink of significant economic reform, the actual economy is set for a much more stable period, albeit that thisstability will mask considerable sector variations. For instance, in thefirst three quarters of 2013 thechemicals sector as a whole sawaround 10% growth but some sub-sectors achieved as much as 20%.Such growth was also achieved despite a challenging backdrop of cost inflation for producers with labour, property and energy costs all rising strongly last year.

In terms of cross-border M&A trends, the past year was once again characterised by strong activityfrom China’s big energy players with PetroChina, Sinopec, Sinochemand China National Power Grid allmaking major acquisitions abroad.However, one of the largest deals saw meat processor ShuanghuiInternational acquire Smithfield Foods Inc, the largest ever acquisition of a US company by aChinese business.

In terms of cross-border dealsinvolving UK players, one of the mostnotable transactions was Croda’s

José María Alberú, IMAP Spain

A year ago our economy was on the brinkof an EU bailout, on the edge of adownward spiral of high interest rates andeconomic depression. But as we welcomein 2014 the picture is, economically atleast, far brighter as the country has finallyreturned to quarterly GDP growth.However socially, with an unemploymentrate of more than 25%, there remainmajor issues.

So what has driven this improvedeconomic sentiment? Both governmentand business have played their part. Astring of government reforms have given astrong signal to markets that the country isback in business as it moves away from itsdependence on construction. A renewedfocus on tourism has had considerablesuccess, while labour reforms have createda far more flexible market.

The result is that Spain has become far moreproductive and competitive as we produce

the same goods with less people. At thesame time companies have startedexporting far more, in part precisely becauseof this competitiveness, and in part becausethey realise that accessing global markets isso necessary for their own growth.

Indeed, some Spanish companies have nowreached a size where they can actively golooking for deals abroad. An interestingrecent example was CIE Automotive buyinga majority stake in the combined autoforging business unit of India's MahindraGroup, precisely so that it could accessnew markets and supply networks.

Another sign of this stronger sentiment hasbeen the return of Private Equity (PE), whichnow sees good value across many sectorsincluding chemicals. The likes of Blackstoneand HIG Capital have been buying up realestate portfolios, while there has been muchactivity around the financial sector.

Financial institutions have been aparticularly big driver of M&A activity since the government bailed out a numberof banks and created a bad bank, withassets then sold in blocks to investors. We ourselves have also witnessed thereturn of PE to M&A activity, recentlyadvising a PE player on the buyout of oneof the largest fragrance and flavouringcompanies in Spain.

An improved economicsituation in Europe bodes well for M&A activity in thechemicals sector in 2014 but challenges remain, saysMichael Rieder from IMAP Germany.

13IMAP


acquisition of Sichuan Sipo, amanufacturer of fatty acidproducts. Sipo was not aparticularly well-known companyhere in China before the deal, buttheir products are very strong witha solid IP offer. It just shows howWestern companies can now buildup operations in China throughacquisition.

There are up to 40,000 chemicalcompanies in China, so choosingwho to work with can beproblematic. If a target operates inyour specific sector then it is lessdifficult, but if you are looking forsomething that isn’t a directcompetitor and yet could becomplementary then that istougher. However, I think we willsee more and more of these kindsof deals.

In fine chemicals, as we have seenin other sectors, there has been asignificant trade-up in terms oftechnology. Chinese companies areincreasingly developingtechnologies themselves, ratherthan relying on knowledge gainedin the West, and the more theyinvest now in R&D the less theywill need to in future.

Despite a good financing environment and an improving economic picture, M&A activity in the chemicals sectorsurprisingly remained rather subdued in2013 with virtually the same number oftransactions involving a German companycompared to the year before. While 2012saw 242 deals in the sector there were239 last year.

In particular, we expected more PE interestbecause of the improved acquisitionfinancing available for investors. However in the event, there was nonoticeable rise in PE interest compared to 2012 at all.

Considering the challenges that thechemical industry faces, perhaps thesefigures should not come as too much of a surprise. Decreasing sales pricesin the specialty chemicals segment; a still uncertain economic outlook; a strong euro; rising energy prices; andcontinued uncertainty around the shale gas industry are all playing their part.

For instance, here in Germany therecontinues to be much political debateabout the benefits of shale gas and I thinkit will take some years before we have thechance to fully explore its potential.

Specific user markets such as plastics have also undergone massive change.

For a long time the simple function of aproduct was the main focus, but nowthere are a whole catalogue of rawmaterial related requirements to consider(such as emissions), both duringproduction and over a complete life-cycle.

However, this also amplifies traditionalM&A drivers such as access to newcustomers; geographical coverage; theacquisition of expertise; and the scope toincrease your revenue beyond organicgrowth and achieve critical mass. Indeed,our project pipeline supports theseexamples right now. For instance, we arelooking for medium-sized companies,especially in the plastic compoundingsector, with special application know-howfor Asian investors. We are also screeningthe market for strategic partners to buildproduction capacities for a producer ofbioplastics.

We are also seeing an increased number ofbuy-side mandates, particularly from theUS and Asia, with investors on the hunt forattractive German companies who canoffer both strong IP and brands. Indeed,where once Chinese investors would havebeen more interested in the IP, today wefind they are just as interested in the brandvalue too.

14PE focus

In our regular look at trends within the PE industry, we speakto Trey Vincent, head of Riverside Europe Partners’ UK office.

PE focus


Riverside has had a European presencefor many years. Why have you onlyrecently opened in the UK?

We first opened in Eastern Europe in the1990s as we were working on some dealsover there. Since then we have takenmeasured steps westwards into Germany,Benelux and Scandinavia as we becomepan-European. When we arrived in the UK,we wanted to have done a few deals hereso that we were seen as a credible player.For Riverside, it is all about global reach andwe have also opened offices in Australasiaand Asia. It is about helping companiesexploit today’s global opportunities.

Why do you tend to look at thesmaller end of the mid-market?

We look at sub £100m companies becauseat that size if you have a great productthen there is always that bit more legroomto grow. Also, at that size companies needfirms like us to guide them through theseglobal opportunities. A big multinationalcan, by and large, find its way across theFar East and China. But smaller companiesstruggle.

Is the Far East a particular focus?

We’ve had a team in Hong Kong for manyyears and in the early days it was very

much about helping US or Europeancompanies source products in China. Nowit is much more of a two-way street, weare helping these companies move in andactually start selling goods in China too.Right now China is getting more expensive,more competitive and an ever-toughermarket, so you need to approach it in theright way. We can help an investor find theright business partner, and if it wants to setup a manufacturing operation then wehave the feet on the ground to help. Wecan cut through the uncertainty.

How active have you been in thechemicals sector?

Although we are generalist investors, givenour global focus and the fact thatchemicals is such a global industry there isa natural fit. One of our first deals in the UKwas our investment in SentinelPerformance Solutions, a supplier ofresidential heating and hot water systemtreatment products, which we acquiredfrom GE. We went on to sell the business in2011 to Electra Partners. More recentlywe sold DuBois Chemicals, an Ohio-basedprovider of specialty chemicals, to AuroraCapital Group. In general, we tend to steeraway from contract commoditymanufacturing and focus on businesses

with strong branded products just likeSentinel and DuBois.

What trends are you seeing in thesector?

It is all about staying ahead of the curve,and regulation is only a one-way street.What are the chemical substances widelyused in industry today that will be deemedharmful in 10 years time? Can you get inand reformulate a product now? Where isthe IP you need to be finding to help youget there? I think the whole green agendastill has legs too.

What can we expect on the M&Afront in 2014?

Globally it’s still tough. In the UK there isstill too much money chasing not enoughdeals so people are overpaying on verygood assets such that the returns on thosedeals have come down. However, thedifference to the pre-crash days is thatpeople are not overpaying for mediocrebusinesses. In terms of the wider globaleconomy, I don’t see a great catalyst tospur growth over the next few years. It’schoppy out there and I can see us bouncingaround with low growth for the next fiveyears or so.

Global presence,Global expertise

MUMBAI • SHANGHAI/BEIJING • MUNICH • ZURICH • TOKYO NEW YORK/CHICAGO • LONDON • MADRID • PARIS

Doing a deal in the chemicals sector? You’ll find leading advice across the world.

www.clearwaterinternational.com

9 Colmore RowBirmingham B3 2BJ

Tel: +44 845 052 0360Fax: +44 845 052 0361

62-65 Chandos PlaceLondon WC2N 4HG

Tel: +44 845 052 0300Fax: +44 845 052 0303

50 Brown StreetManchester M2 2JT

Tel: +44 845 052 0340Fax: +44 845 052 0341

16 The RopewalkNottingham NG1 5DT

Tel: +44 845 052 0380Fax: +44 845 052 0381

Zaklady Chemicze Alwernia SA

Acquired 100% of business operations from Ciech SA

IMAP advised on the sale of the company

Alwernia Invest SP. z o.o.

Grupo Plimon

Provided term loan facility

Clearwater represented the borrower

Banking syndicate

Iberchem

Backed a Management Buy-Out

Clearwater advised on the MBO process

Magnum Partners

Cofarcas SA

Acquired 100% of business operations

Clearwater advised on the purchase of the company

Quimitécnica.com

Date post:	05-Feb-2018
Category:	Documents
Upload:	haminh
View:	217 times
Download:	2 times

IP CHALLENGES -...

Documents