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RAINMAKERS - Bunsen Banker

Chemicals deals are still bubbling up, and Merrill's Greg Kelly is sure to be in the mix.

WHEN CHMICAL MAKER BASELL'S $19.2 BILLION ACQUISITION of Lyondell Chemical Co. closes this month, it will be the sector’s biggest-ever takeover. But don’t expect that record to stand for long.

“I’m not sure if it’ll make it through 2008,” says Greg Kelly, head of Merrill Lynch & Co.’s chemicals investment banking group, which advised Basell on the transaction.

Kelly should know. He has counseled many of the companies that have made big deals in the fast-consolidating industry. This year, in addition to counseling Basell’s parent, Access Industries, on the Lyondell deal, Kelly advised directors of Denver-based specialty chemicals company MacDermid on its $1.3 billion buyout by a management-led investor group. He also made his first trip to China, where he helped private equity titan Blackstone Group buy a minority interest in China National BlueStar (Group) Corp., a subsidiary of state-owned China National Chemical Corp. The visits are likely to continue, as Western companies increasingly look to China to cut manufacturing costs and as Chinese companies seek access to U.S. and European markets.

That’s fine with Kelly, 41, who savors the 12 to 15 overseas business trips he takes each year. The sixth of seven children, Kelly didn’t get to travel much while growing up. His father, a reporter for western Maryland’s Cumberland Times-News, died when Kelly was just six, forcing his mother back to work as an elementary school teacher to support the family. As a child Kelly got used to making the best of less-than-optimal circumstances, a quality that has served him well since he joined Merrill in 1993.

Shortly after he came on board as an investment banking analyst covering a range of sectors, he was unexpectedly — and involuntarily — transferred into a newly forming chemicals group. Huston McCollough, then the firm’s head of investment banking, called him one day to give him the news. “He said, ‘We’re going to put together a chemicals group. It’s a great opportunity for you,’” recalls Kelly. “I said, ‘You know, I kind of like consumer products and health care.’ He said, ‘It’s a great opportunity for you. Glad you’re going to accept it.’”

The assignment may not have been what he had in mind, but Kelly ended up liking it. Once he built some expertise in the sector and began to form relationships with companies, he found that the highly technical subject matter made it tough for less-experienced competitors to gain ground.

“From a banker’s perspective, there are barriers to entry,” he says. “Not everyone is comfortable talking about polypropylene or insecticides, so it’s a pretty tight-knit community.”

And clients say Kelly most definitely speaks their language. David Weidman, chairman and CEO of Celanese Corp., praises Kelly for the speed and quality of execution of the Dallas company’s recapitalization during the second quarter of 2007. The deal replaced $3.8 billion of debt with new loans, cutting interest costs by some $60 million annually and reducing overall obligations by $133 million. “The Merrill Lynch team, led by Greg, was outstanding,” says Weidman. “Their contacts and relationships in placing the debt were without peer, and we’re incredibly satisfied with the job they did.”

Apart from growth in China, the other big factor driving chemicals M&A is the desire of companies with cyclical revenues to smooth that volatility by acquiring rivals that have slightly different business mixes. One such deal came last year, when German industrial chemicals giant BASF launched a $5.3 billion hostile bid for rival Engelhard Corp. Kelly helped Engelhard look for a white knight bidder as an alternative to BASF; when none materialized he advised Engelhard to issue debt and buy back 20 percent of its shares at a higher price than what was being offered by BASF. The move failed to fend off BASF but forced the acquirer to pay $2 per share — or $300 million — more than its initial offer, bringing the eventual transaction value to $5.6 billion.

“One thing we appreciated about Merrill Lynch, and Greg particularly, is that they would pay attention to us when times were quiet,” says Michael Sperduto, who was Engelhard’s CFO at the time of the takeover battle but retired after the deal was completed. “When this deal came along, I had every banker in the world ringing my phone for weeks on end, and I said, ‘Look. I’ve been working with people for years here already.’ When the big transaction did hit, that’s who we turned to.”