Nalco Holding Co. can't afford any missteps in its chemical business after a consortium of leveraged-buyout specialists saddled the company with a heavy debt load while hauling off big dividends for themselves.

New York-based Blackstone Group L.P., Apollo Management L.P. and Goldman Sachs' GS Capital Partners L.P. wasted no time in recouping their $991.9-million investment in Nalco after purchasing the company for $4.1 billion from France's Suez SA in late 2003.

Within months of closing the deal, the owners paid themselves a $446.9-million dividend from debt issued by Nalco. Last November, the trio collected $544.6 million from the proceeds of Nalco's initial public offering. The remaining $175.9 million from the IPO went toward reducing the debt from the owners' dividend. Meanwhile, the bulk of the Nalco purchase was financed with loans leveraged against Nalco's assets.

Market observers say shareholders have become increasingly wary of stock offerings like Nalco's that do almost nothing to benefit the companies themselves. Boise Cascade Holdings LLC last week canceled an IPO that would have channeled most of the proceeds to Boise's owner, Chicago-based private-equity firm Madison Dearborn Partners LLC.

'STRANGLED BY ITS DEBT'

Despite mostly losing money in recent years, Nalco executives are counting on a 5% to 7% increase in annual sales to boost earnings by more than 20% a year for the next several years, while providing enough extra cash to knock down the company's $3.4-billion debt. The company plans to dedicate about $200 million in excess cash to debt reduction in 2005 on top of more than $200 million in interest payments the company expects to pay.

"We can comfortably handle the amount of debt we have," says a Nalco spokesman. "We're not a capital-intensive business."

To pull off this strategy, though, Nalco will have to hold the line on major acquisitions or significant increases in capital spending.

"This company is basically strangled by its debt," says Francis Gaskins, president of IPO Desktop, a Los Angeles-based research firm. "Anything that takes capital, Nalco can't do it."

Nalco's stock, which debuted at $15 per share in early November, has fallen about 15% after reaching a near-term high of $20.40 a share in the middle of February. The stock now trades near $17.80 a share. Nalco's stock is still carrying a pricey valuation, trading at 29 times projected 2005 earnings, compared with a multiple of 16 for the broad-market Standard & Poor's 500 Index.

In the first quarter, the company earned $11 million, or 8 cents a share, compared with a loss of $126.7 million, or $1.40 a share, in the same period a year earlier. Sales grew by 9% to $777.6 million.

©2005 by Crain Communications Inc.