Avantor’s new stock offering is making its private-equity owners rich; can it do the same for investors?

Ten years after he sold Philadelphia’s global chemical maker Rohm & Haas to Dow Chemical for $15 billion, Raj Gupta is taking another company public. He’s chairman of Avantor, which Gupta and his advisers at New Mountain Capital have assembled from Radnor-based drug-lab equipment-maker VWR and smaller “high purity” chemical companies that make such products as NuSil silicone breast implants and J.T. Baker acids.

Two years after VWR was bought and taken off the Nasdaq stock market by New Mountain, Goldman Sachs and others in a $6.5 billion stock-and-debt deal, it’s back, making up most of Avantor, under a new stock symbol, AVTR. It is expected to begin trading this month, in one of the Philadelphia area’s biggest initial public offerings (IPOs) recently. (Update: Avantor was certified by the New York Stock Exchange on May 14).

At a projected $19.50 a share, the sale would value Gupta’s company at about $7 billion, including stock still held by New Mountain and Goldman Sachs after the IPO. The company’s legal headquarters is at VWR’s old offices in the Radnor Corporate Center, with a second base in Center Valley, near Bethlehem.

The IPO will raise $4.4 billion in all -- not to grow Avantor, but to pay off its private investors, executives, and bankers. CEO Michael Stubblefield, a veteran chemical-company boss and ex-McKinsey consulting adviser, gets $14 million when the IPO is done. Other executives will split $24 million. Gupta -- who owns Avantor shares worth $50 million at the IPO price, and other insiders stand to make millions more.

The rest of the money will go, not to build up the business, but to the outside investors who put the company together and loaded it with debt, and now hope that public investors will buy the stock at prices inflated by the long bull market -- a familiar pattern with America’s aging industrial companies.

Avantor’s debt is so big that the firm has warned prospective shareholders that it will have a tough time paying its bills when the economy eventually slows, if it doesn’t quickly turn highly profitable.

The new company owes $7 billion -- more than its yearly sales, and 3½ times VWR’s $2 billion debt when it went private two years ago. T

Avantor revenues totaled $5.9 billion last year, up from $4.5 billion at VWR in 2016, its last full year as a public company, thanks to the added businesses. Earnings are lower -- a loss of $87 million last year, and it incurred more losses this spring, compared with a positive $148 million in after-tax earnings for VWR in 2016.

The IPO culminates 10 years of effort by Gupta, Avantor’s chairman, to build another public chemical company after selling Rohm & Haas to Dow. His advisers included Edward Breen, architect of the Dow Chemical-DuPont merger and the earlier Tyco International breakup.

Gupta started scouting chemical and pharma deals for New Mountain in 2009, shortly after his Rohm & Haas sale. Gupta quickly targeted the Mallinckrodt Baker “high-purity” lab, electronics and drug chemical supply business, then owned by Covidien, one of the firms Breen had spun off while dismembering Tyco. After a year’s “due diligence,” Gupta told me in 2016, New Mountain bought the business, renamed it Avantor, and began cobbling on other small companies.

Those Avantor units were “under-led and under-invested,” Gupta said. "We saw this opportunity to globalize. Put some new technology in it. And some talent.” At private firms, managers and directors can move fast. Instead of obsessing over quarterly earnings patterns, "we talk about cash flow and what we can bring in and out.”

Company and New Mountain executives weren’t saying much about Avantor’s prospects last week in the “quiet period” leading up to the IPO. Spokeswoman Allison Hosack referred queries to the 410-page registration statement Avantor filed with the Securities and Exchange Commission on Monday.

That plump document tells of a transformation that enriched the company’s owners, managers and directors but leaves public share buyers facing obvious questions.

Avantor’s interest payments last fall were more than its operating profits. It paid more than half a billion dollars to lenders in 2018, and is scheduled to owe hundreds of millions more in each of the next few years, rising to nearly $2 billion in the fall of 2024. The registration statement also documents more than $2 billion in cash payments by Avantor and its affiliates to New Mountain.

To be sure, Avantor has a strong market position in the U.S. and Europe. The company claims as customers the 10 largest drugmakers, medical-device makers and diagnostics companies, the five largest U.S. government agencies, all but one of the five major semiconductor makers and five global aerospace companies, and 19 of the 20 largest U.S. and European universities.

Almost three-quarters of the company’s sales are from “materials and consumables” -- lab glassware and custom supplies, chemicals, testing and clinical trial kits. The company also sells filtration systems, incubators, freezers, evaporators, biological “safety cabinets,” and biopharma lab services.

Where can Avantor boost its sales? “China, Southeast Asia and Eastern Europe offer a strong opportunity for growth,” Avantor says. The company also said it’s worried about copycat manufacturers and intellectual-property thieves, who have made other medical suppliers wary of the vast China medical market.

Maybe it can boost profits by cutting back? “Headcount reduction programs” will trim the workforce (now 12,000, mostly in the U.S. and Europe).

As usual in IPO registrations, Avantor issued a string of warnings:

After the IPO, New Mountain and Goldman will control seats on the board. Avantor’s interests may “conflict” with those of outside shareholders.

The announced share price is much higher than the book value of Avantor assets. Accounting “goodwill” -- the premiums the hedge funds paid for businesses they bought -- is five times the value of the company’s factories and other tangible assets, making it vulnerable to a quick writedown and credit freeze in tough times.

Avantor’s debt will suck down so much cash flow it threatens to “reduce the funds available for working capital, capital expenditures, investments, acquisitions,” and put Avantor “at a competitive disadvantage" against "less leveraged competitors.”

The company operates 27 factories. Avantor faces environmental liabilities for water it contaminated near its plants om Phillipsburg, N.J., and Gliwice, Poland.

Gupta has said he believes in putting well-connected directors to work growing a company -- and in paying them well. As board chairman, Gupta collected more than $500,000 for his Avantor board work last year. Avantor plans to pay its other directors a minimum $275,000 a year.

The company’s leaders and private investors have shown that they can pay themselves well. Can they keep improving the business? And will public shareholders profit, too?