Late last month, Apollo Management LP and Goldman Sachs Capital Partners lost a heated auction to Blackstone Group for Suez SA's U.S. based chemical maker Ondeo Nalco Co.

Undeterred, the two private equity firms spent the first week of September muscling into a co-lead position alongside Blackstone in the multibillion-dollar deal.

French utilities group Suez said Thursday, Sept. 4, that it's selling Naperville, Ill.-based Ondeo Nalco, which makes specialty chemicals used in water treatment and in industrial processes that separate liquids from solids, according to a source involved in the auction.

The buyers will pay $4.35 billion, including the assumption of leases worth $150 million, which Suez said equates to an Ebitda multiple of 8.1.

A lending group will underwrite a loan and bond commitment of about $3.2 billion, the buyers said in a separate statement Thursday. The buyout groups did not reveal the names of the lenders, but sources said Wednesday the group could include Citigroup as lead financer as well as UBS Warburg, J.P. Morgan, Bank of America Corp., Goldman, Sachs & Co. and Deutsche Bank AG

Nalco generates $540 million in trailing 12-month Ebitda on $2.6 billion in sales. The business makes products used in treating oil, and in food and pharmaceuticals as well as in paper production. Nalco is also a water treatment service provider, which gives the company steady cash flow. The company registers just over half its sales in the U.S., with the rest coming from high-growth regions such as East Asia.

New York-based private equity powerhouse Blackstone several days ago won the hotly contested Nalco auction, and then asked Apollo and Goldman to participate as a minority investors, a source said. Blackstone, which in August 2002 raised a $6.45 billion fund, could have executed the leveraged buyout itself by investing $1 billion in equity while financing the rest of the deal. But the buyout firm decided to spread the risk.

But Apollo and Goldman refused, insisting instead on being co-lead investors in the LBO. The two firms said they would only participate in the transaction if they were an equal partners, sources said. Blackstone then elected to play this one safe and not take a solo role in such a big deal.

Tony James, Blackstone's banking chief, said Wednesday: "Blackstone never expected to put more that $600 million long term" into Nalco. "I never want to put more than $1 billion in equity in any deal. Our sweet spot would be around $400 million."

Apollo and Goldman teamed to bid for the Suez unit earlier this summer. Back in May, Apollo was invited to compete in the limited Nalco auction; Goldman was Apollo's M&A adviser and chief source of debt financing. One month later, Goldman Sachs Capital Partners teamed up with Apollo.

The new consortium was allowed to enter into the auction at this late stage because the new partner Goldman was already up to speed on the deal, sources explained. This decision by Suez came despite the seller's earlier insistence that bidders not partner up — in order to create a more competitive auction process.

Suez paid $4.5 billion in 1999 for Nalco, including assumed debt, equivalent to an Ebidta multiple of 10. Earlier that year it paid about $421 million for related business Calgon Inc. and went on to merge the companies. Suez said Thursday it will take a one-time charge of €700 million ($759 million) in the first half on the disposal. It added that the sale will cut net debt by $3.8 billion and will boost profit slightly by improving its return on capital employed.

The sale of Nalco completes the company's €9 billion disposal program announced in January but the company Thursday added €2 billion-worth of communications assets to its disposal agenda.

In early 2003, under pressure from shareholders and credit rating agencies, Suez launched its "2003-2004 action plan," in effect a pledge to reduce its €26 billion debt by a third through asset sales.

In February, Suez sold noncore assets including stakes in insurer AXA SA, oil group Total SA, and construction company Vinci SA, for a total €400 million. In April, it raised €1.8 billion by selling most of its historical 10% holding in Belgian-Dutch banking and insurance group Fortis SA/NV. In May, Suez agreed to sell 75% of Northumbrian Water Ltd. in a deal that values the British water and sewerage business at £3.2 billion ($5 billion).

In recent years, an Apollo team led by Josh Harris has bought several chemical companies, including Houston-based Resolution Performance Products LLC for $858 million in November 2000, Compass Minerals Group Inc. of Overland Park, Kan., for $640 million in a November 2001 buyout.

Goldman has also participated in some big chemical deals, including the €2.6 billion buyout of industrial gases company Messer Griesheim from Aventis SA and the €2.7 billion buyout of Cognis Chemicals from Henkel KgaA.

Blackstone, however, has looked at but never made a sizable investment in the chemicals sector. For buyout firms, though, Nalco is appealing because it throws off reliable cash flow. It also holds a leading and defensible market position, analysts say.

Private equity buyers, then, should be able to leverage Nalco and pay off the debt assumed in an LBO with relative ease. But what about the exit? There are no strategic buyers that compete with Nalco except General Electric Co., which helps explain why there was little competition for the buyout firms in the auction. Fairfield, Conn.-based GE likely could not have bought Nalco without raising antitrust concerns. Selling to GE is equally unlikely, which means the new owners will probably have to recapitalize Nalco in three to five years, sources explained.

Suez was advised by UBS Investment Bank and Rohatyn Associates. HSBC issued a fairness opinion on the valuation and sale procedure.