Quaker Chemical to acquire rival Houghton

Shares of Quaker Chemical Co. traded as high as $153.90, highest in the 99-year-old company's history, on Wednesday morning after the Conshohocken synthetic-oils maker agreed to buy its Norristown-based, 150-year-old rival, Houghton International, in a deal valued at more than $1.4 billion in cash, stock, and debt.

The deal, if approved by regulators in the United States, Europe, and Asia, would end a neighborhood rivalry in what has become a highly competitive, fast-consolidating global industry. "I'd liken us to Villanova and St. Joe's," Houghton CEO Mike Shannon told me in an interview a year ago.

They won't need two campuses anymore: Quaker chairman, CEO, and president Michael F. Barry, who will run the combined companies, plans to save $45 million from cost and purchasing cuts. Quaker spent about $200 million last year on selling, general, and administrative expenses. Houghton and Quaker each employed about 2,000, including 140 and 154, respectively, in Montgomery County.

"We're bringing together a lot of great people, and a lot of great product lines. We'll be able to grow faster," Barry told me in an interview Wednesday. Who will stay? "We're going to go through a process for all the best people at Quaker and Houghton over the next few months," before naming a joint management team. 

Quaker is giving Houghton's owner, Hinduja Group, 4.3 million shares and $172.5 million in cash, and is taking on $690 million in Houghton debt to buy the company. In addition, Quaker is borrowing $1.15 billion from Bank of America-Merrill Lynch and Deutsche Bank to fund the deal, which Barry said it will pay down from future, higher profits.

Though it is being acquired, Houghton is slightly larger, with $767 million in yearly sales to companies including Alcoa, ArcelorMittal, Boeing, Ford, and Volkswagen, versus $747 million for Quaker, which services giants including GM, Chrysler, AK Steel, and U.S. Steel. More than half of its business is non-U.S. 

Houghton has also been a little more profitable, which Barry, in an investor conference call, attributed to Houghton's status as a private company, free of the regulatory compliance costs required for a U.S. stock-market listing.

Though they sell similar products, Barry said, there is little overlap in the companies' factory and sales networks. Quaker has a plant in Mexico and significant sales in Brazil; Houghton has a plant in Thailand and has purchased companies in Germany and South Korea. Of the companies' 15,000 total customers, most are "unique" to one or the other, creating sales opportunities after the merger, Barry told investors.

The partners may have to unload some operations to satisfy antitrust regulators. 

The marriage combines two of the global companies that supply steel and aluminum makers and other heavy industry with the grease that keeps metal from sticking and overheating.  Rivals include Ohio-based Milacron, U.K.-based Castrol, Yoshiro of Japan, the Henkel and Fuchs brands in Germany, and units of oil giants BP and ExxonMobil. "But it's still a highly fragmented industry" on the national level, with many local players, Barry told me.

Quaker and Houghton each claim a "customer-centric" business model that includes networks of small lubricant-production plants — typically employing fewer than 50 — with salespeople and engineers stationed in customers'  large factories.

Houghton and Quaker are survivors of the old Delaware River oil industry. They were among the smaller firms that bought raw materials from the old Sun Oil Co., Atlantic, and other Philadelphia-area refiners and processed them into specialty lubricants.

Today, the industry's products are largely synthetic and designed to comply with global environmental and recycling rules. Neither still has manufacturing plants in the Philadelphia area.

Family-owned for most of its history, Houghton was sold by members of the McDonald family in 2007 to AEA, a buyout fund representing Rockefeller, Mellon, Harriman, and S.G. Warburg investment interests. In 2012, AEA sold Houghton to the India-based Hinduja Group, whose properties include electric power, former Gulf Oil convenience stores, and Bollywood movies, along with manufacturing companies.

After the deal closes — late this year or early next, the partners hope — Hinduja will own almost one-quarter of Quaker and gain three seats on an expanded Quaker board totaling 12 members. "We are pleased to enter this agreement," Sanjay Hinduja, Houghton's chairman, said in a statement.