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The Alchemists | Jim Ratcliffe


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Published in: 2018

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Jim Ratcliffe is a British billionaire, with a net worth of $16bn, and the main shareholder (66% ownership) and founder of the chemical group INEOS. Since the founding in 1998, INEOS has grown, mainly through acquisitions, from a small obscure chemical company in Antwerp to global giant. INEOS now has over 100 sites worldwide, some of the chemical plants the size of the City of London, and the group has a total turnover of over $90bn [2021]. Even though INEOS is Britain’s largest private company, it is not a household name. INEOS’s heritage, the acquired businesses, comes from several well-known blue chips like Amoco, BASF, Bayer, Borealis, BP, Degussa, Dow Chemical Company, Enichem, Erdölchemie, Hoechst, ICI, Innovene, Lanxess, Monsanto, Norsk Hydro and Solvay.

LEAVES THE CORPORATE WORLD AT 39. Ratcliffe is a chemical engineer with an MBA from London Business School. In 1992, at an age of 39, after many years within deal-making roles at large corporations, he bought a speciality chemical business from BP for £37m. He put £140k into the deal himself (everything he and his family owned), and got the rest financed through his former employer Advent International. During the deal, Ratcliffe met Andy Currie as well as John Hollowood, who would become lifelong business partners. In 1994, they floated the newly acquired business, Inspec, at a value of £164m. Due to the leverage in the deal, management’s shares went up by a factor of 198x. In 1995, Inspec geared up again and bought BP’s ethylene oxide, and glycol, businesses for £78m.

INEOS IS BORN DURING THE ASIAN CRISIS. In 1997, the Asian crisis led to a crash in global stock markets which caused Inspec’s advisors to start worrying. They told Ratcliffe to sell the Antwerp assets (a commodity business), raising cash and profitability, and by that get a potential to double the share price. Ratcliffe decided to go ahead with the idea and bought out the Antwerp business, which had a turnover of $200m, himself. This was the birth of INEOS – founded by Ratcliffe, Currie and Hollowood. To finance the deal, Ratcliffe raised £84m which came from £72.5m through junk bonds, £10m through a loan from the investment house Murray Johnstone and £1.5m from the three partners and management. Inspec’s books hadn’t been in great order, and it wasn’t until a year after Ratcliffe left Inspec that people began to understand that the Antwerp plant had contributed to 40% of the group’s profits.

1998 – 2008: ACQUISITION SPREE OF ORPHANED ASSETS. The original Antwerp site, with new management, quickly grew much bigger and more profitable. New debt could be raised against the business, and the site financed the major acquisitions in the early years. Between 1988-2008, INEOS acquired 22 chemical businesses from corporate giants such as BP, ICI and BASF. The two most notable were ICI’s commodity chemicals business in 2001 and Innovene, the olefins and derivatives and refining subsidiary of BP, in 2005. INEOS bought Innovene, with a turnover of $25bn, for $9bn – a deal that quadrupled INEOS turnover. To finance the deal, INEOS again turned to the debt markets and – again – became highly levered.

2008 – 2010: HEAVILY INDEBTED INTO THE FINANCIAL CRISIS. Three years after levering up to buy Innovene, INEOS was still largely funded by bank debt (debt of $8.5bn to a syndicate of 230 banks). INEOS breached its covenants and Ratcliffe was technically bust with the company worth less than its debt. The banks could ask for their money back and put INEOS into insolvency. To make matters worse, chemical competitor LyondellBasell filed for bankruptcy with $26bn in debt – the largest bankruptcy in the history of the industry. INEOS bonds traded at 10% of par value and attracted hedge funds investing in distressed debt. Ratcliffe pushed through, knowing that the core was sound and persuaded the banks and other debt holders that it was not in their interest to take over the chemical assets. With immense shutdown and start-up costs, INEOS also couldn’t risk shutting down the refineries and crackers. They had to keep them going, even though there were no demand for the products.

“We were putting petrochemicals onto boats and just sending them off in the hope that by the time they arrived somewhere we’d have found someone who would be willing to buy them.”

2011 – START OF THE JV-ERA. The credit markets reopened again in 2010 and INEOS refinanced through issuing a new bond. After the finances steadied once more, the company picked up M&A activities again but this time with a new twist. Rather than purchasing unwanted companies outright, INEOS started pursuing JV’s with competitors in markets where they both struggled. Consolidating the markets to re-gain profitability, and by buying out the partner after a period of a few years, at a pre-determined earnings multiple, no one had to exit the market during the worst part of the cycle. In 2011, INEOS did it largest ever JV in Petroineos; a 50:50 JV with PetroChina. During the same month, INEOS and BASF merged their styrene businesses to form another 50:50 partnership, Styrolution. Later on INEOS did another a JV with Solvay, merging European polyvinyl chloride assets.

INEOS – A FEDERATION. INEOS operate a federal structure with a tiny head office with staff of around 40. Companies of similar size often has hundreds or thousands at HQ. Each INEOS business is fully responsible for all its functions like IT, HR, communications, banking, legal, tax. Head office has one senior exec for each of the functions to ensure a level of consistency across the group. Each business has a chairman, a CEO and a board, typically comprising a CFO and directors for operations, business and procurement. Businesses participate in a half-day meeting every month or so with INEOS Capital to cover recent performance, safety as well as financial, together with budgets and investments.

ACQUISITIONS – REPEATING A SUCCESSFUL FORMULA. INEOS has used the same business model for over twenty years. Key elements are buying good-quality assets no longer strategic to their parents, running them better and then expanding them. A typical “unwanted asset” is a business no longer meeting a blue chip’s financial ambitions or future strategic plans and is also often quite cyclical, depressing the valuation of the blue chip’s stock price during the downturns in its industry. Being private, INEOS does not have to care about any year’s earnings. INEOS also do not care if the business is a commodity or not. To Ratcliffe, it is the earning power over a cycle that matters. According to Ratcliffe, a common reason that acquisitions often fail, is that the buyer wants the business too much. Having many choices makes it easier to have the strength to walk away from a deal. To bridge the gap between the seller’s expectations and INEOS valuation, the company often used vendor loan notes, earn-outs or JVs.   

‘We were quite young and full of energy. We had a model that worked, so why not keep repeating it?’

DEBT BEFORE EQUITY. It is almost unheard of to find a company the size of INEOS that is 100% controlled by the three founders. Ratcliffe learned from Inspec that going public was not a course INEOS wanted to take. Instead of issuing equity, they pursued debt financed acquisitions. Debt can always be paid back or exchanged for other debt. But equity cannot be redeemed by choice. But due to INEOS indebtedness, there have been many close calls over the years. Now in a more mature phase, INEOs is in a much more solid financial position, and have learned from the worst of their mistakes within the world of leverage. Today INEOS is very covenant-lite.

A STRONG FOCUS ON FIXED COSTS. Taking over unwanted assets from blue chips, INEOS quickly learned that the organizations were often bloated bureaucracies with a lot of fat to cut. In the heady days of the 1970s and ’80s, as oil and gas gushed in huge quantities and profits were sky-high, the blue chips weren’t exactly focused on their fixed costs. In the oil price crash of 2014, however, many of the large asset owners did not have the agility to reassess these costs. As an example, in one company bought from BP, the IT costs amounted to $100m, a figure that in INEOS ownership shrunk to less than $40m. Ratcliffe always question the headcount, especially of the head offices. Can a function of twenty still operate with fifteen, or ten or five? Are there plants to put together and with that decrease the fixed costs? In the chemicals industry, maximising capacity – debottlenecking – is fundamental to efficiency and profitability. But in a chemical plant, you can’t cut costs everywhere without exposing yourself to blow-up risk.

THE MAGIC 15% A YEAR. Five years to double EBITDA. That has been the key goal within INEOS. Having this of a high bar made it easy to quickly turn down prospective acquisitions that didn’t lend itself for such growth. The high bar also functions as a great challenge and makes management more visionary.

‘Part of the INEOS philosophy is to encourage people to take on more. It’s remarkable what people can achieve when they turn the brakes off in their heads.’

RIGID FINANCIAL DEPARTMENTS. INEOS has honed its own accounting system to track every dollar, tracing profit and loss among the maze of processes that run daily on its sites. Many complex enterprises of this size don’t manage cost. Ratcliffe was, for example, able to make a great acquisition buying out the Antwerp facility at a low multiple due to having a finer understanding of its financials workings than the other part in the deal.

THE PET PROJECT “THE GRENADIER”. Ratcliffe is an avid adventurer as well as sports person out on several different challenges around the world every year. He is also pushing through health and exercise programs for the employees at INEOS and continuously arranges global “company adventures”. One of Ratcliffe’s personal favourites have gotten to be exploring the world in the classic British car the Land Rover Defender. When Land Rover spoke about discontinuing the production of the Defender in 2016, Ratcliffe saw an opportunity to pick up the production of the classical car. Land Rover later decided to continue with the production, but Ratcliffe was too deep into his “Project Grenadier” and decided to pursue the automotive venture. Production is planned to start by 2022.

‘One should, if one can, try to maximise the number of days that are unforgettable’.

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