Oxy Buys Cain Chemical; Deal Valued at $2 Billion

Times Staff Writer

Occidental Petroleum agreed Thursday to buy a chemicals company in a deal worth more than $2 billion, further boosting Oxy’s presence in the chemicals industry while turning a huge profit for a group of investors in Houston and New York.

Occidental said it will pay $1.25 billion in cash for Cain Chemical Inc., one of the nation’s largest producers of ethylene and other products. The Los Angeles company will also assume Cain’s debt of $830 million.

Cain was forged a year ago in a leveraged buyout that consolidated seven chemical plants on the U.S. Gulf Coast owned by four companies. It was put together by Houston businessman Gordon Cain with such investors as Morgan Stanley and Chase Manhattan.

The investors put $25 million of equity into the new firm that is now being sold for about 40 times as much, said Ray McLaughlin, senior vice president and chief financial officer at Cain, who added, “Not bad, eh?” Cain is about one-third owned by units of investment banker Morgan Stanley, 19% by Cain or a company he heads, 4.9% by Chase Manhattan, 40% by management and employees and the balance by an employee stock-ownership program.


Earned $19.7 Million

Occidental said the purchase of Cain will make Oxy the nation’s third-largest producer of ethylene. Cain is also among the biggest producers of polyethylene, ethylene glycols, benzene and butadiene.

For its first quarter ended Dec. 31, Cain reported net income of $19.7 million on revenue of $320 million.

“We expect that Cain will significantly improve Occidental’s net income and cash flow after providing for interest charges incurred as a result of the acquisition,” said Armand Hammer, chairman and chief executive of Occidental.


Though Oxy is best known for oil and gas, earnings from its growing chemicals operations last year more than doubled to $322 million--more than was realized from oil and gas and more than the conglomerate’s net income of $240 million. The company cited higher volumes and better prices for chemical products, which has boosted profitability in the petrochemicals industry generally.

The company’s last major chemicals acquisition was Diamond Shamrock Chemicals in 1986 for $800 million. Its Occidental Chemical subsidiary already operates about 50 plants, most of them in the United States and Brazil.

Preferred Stock Unaffected

Four of Cain’s plants were purchased from Du Pont Co. The rest were owned or jointly owned by PPG Industries, ICI Americas and Corpus Christi Petrochemical Co.

Oxy said Thursday’s agreement calls for the purchase of all common shares, warrants and options of Cain for $1.25 billion. A spokesman said the company will pay “cash now and long-term financing later.” He would not elaborate.

Not affected by the merger is preferred stock in Cain and a Cain subsidiary. Including the debt and preferred stock at book value, the transaction is worth about $2.2 billion, Occidental said.

$120 Million Pretax Gain

For its part, Chase Manhattan was so pleased with the sale of Cain Chemical to Oxy that it issued a statement Thursday announcing that it expects the deal to result in a second-quarter pretax gain of $120 million.


Investment banks have recently begun taking equity positions in such transactions, but their commercial banking cousins have been slow to follow. Chase, the parent of Chase Manhattan Bank, the nation’s second largest, is an exception.

It acquired the stock in Cain when serving as financial adviser in the formation of the company.

“Equity is playing a growing role in Chase’s corporate finance activity,” said Michael F. Dacey, a Chase corporate finance executive.