SK Capital: $922 Million Ascend Dividend Is Matter of Tax Planning

SK Capital’s decision to take a $922 million dividend from Ascend Performance Materials after a little more than a year of ownership is just a matter of tax planning, says Barry Siadat, SK’s co-founder and managing director.

The $922 million is three year’s worth of dividends pulled forward, Siadat says. Currently, dividends are taxed at 15% but that could change next year. The so-called Bush’s tax cuts are set to expire at the end of 2010. Dividends were taxed as ordinary income before the Bush tax changes were put in place earlier this decade. “Next year, this may even be more,” Siadat says.

So, SK Capital decided to take one large dividend now instead of three separate payouts in 2011, 2012 and 2013. “We have a looming tax increase on dividends,” he says. “What would you do?”

Houston-based Ascend makes a tough, heat-resistant nylon used in automobile production and construction materials. The company had 2008 revenue of about $1.8 billion, according to press reports.

SK Capital bought Ascend from Solutia in March 2009 for roughly $50 million cash. The firm took on $80 million in pension liabilities as well as $4 million in notes, says Siadat. Beyond that, SK Capital’s buyout of Ascend did not include any debt.

At the time, a broad market correction had ground M&A to a halt and practically no one was doing deals, he says. “That was a bad time,” Siadat says. “The world was ending. This was the only deal done in first half 2009 in [the] chemical space, and one of two [chemical] deals done in all of 2009.

SK Capital was the highest bidder for Ascend, which was producing negative EBITDA at the time. The prior owner had also cut bonuses, reduced salaries and stopped matching the 401(k) accounts of its 2800 employees, Siadat says. “We restored those and put $1000 into everyone’s 401(k),” he says. “We gave bonuses and salary increases.”

One year later, Ascend is generating a significant amount of cash and is expected to produce $360 million EBITDA this year, Siadat says. SK Capital has paid off $60 million of the company’s pension liability and has put in another $150 million into building working capital.

When asked how could a company go from negative EBITDA to generating $360 million in a year, Siadat says: “This country is good for hardworking, smart people. We bought at the time when General Electric was valued [at] nothing. At that time, you could buy any [company] at a reasonable price that today is worth multiples of that. This one, we also improved the multiples.”

To support the $922 million dividend, Ascend is currently in the market with an $800 million term loan, according to Thomson Reuters Loan Pricing Corp. A $275 million revolver is already in place. Ascend is worth 8x EBITDA, Siadat says. The refinancing will put “less than 3x 2010 EBITDA” of debt on Ascend, Siadat says. “We’re doing well,” he says. “We worked hard for [the dividend]. We took a lot of risk.”

SK Capital, with offices in New York and Boca Raton, Fla., is not a private equity firm, Siadat says. Instead, it is a private investment firm. The money to buy Ascend didn’t come from an institutional fund. “This was all our own money,” he says.