Analysis: M&A activity is reviving in chemicals industry

16 August 2002 17:02  [Source: ICIS news]

NEW YORK (CNI)--After a comatose start to the year, mergers and acquisitions (M&A) in the chemical industry are gradually picking up with the closing of several large deals and the announcement of the first acquisition of a public US chemical company in two years.

Portfolio restructuring continues to push some activity, while transaction multiples continue at historically low levels, making for a potential trough in the chemical M&A market.

After only $2bn (Euro2.04bn) in deals completed in the first quarter, the chemical industry saw $14bn in transactions in the second, according to Young & Partners, a New York City-based chemicals and life sciences investment banking firm. The first half tally of $16bn in completed deals was far below the $27bn recorded in the first half of 2001. However, it was a vast improvement from the second half of 2001, when only $8bn worth of deals took place.

The number of transactions over $25m in size in the first half fell to 29 from 48 in the year-ago period but was close to the 30 transactions completed in the latter half of 2001.

"The lag effect of September 11 and the global economic slowdown put a halt to many new M&A initiatives in the fall as management focused on their existing businesses," says Peter Young, president of Young & Partners. "That explains the very slow first quarter, but the overall slowdown has been due to the further retreat of strategic buyers from the market and the difficulty financial buyers are having borrowing money."

"There are a lot of busted auctions going on with a lot of properties up for sale falling by the wayside," says Telly Zachariades, senior managing director and head of global chemicals for Bear Stearns. "I don't see any improvement in the market from six months ago. It's not gotten any worse, but not any better either."

The difficult economic climate over the past couple of years has taken the air out of lofty M&A valuations achieved at the peak in late 1998 and 1999. Today, chemical industry M&A multiples are at historically low levels.

After reaching a peak of an average of 13.9x trailing EV/EBITDA (enterprise value/cash flow) for specialty chemical deals in 1999, multiples fell to 7.6x in 2001 and averaged 8.3x in the first half of 2002, according to Young & Partners. At the last trough in 1991, selling multiples also averaged 8.3x (see chart).

The dramatic decline in valuations is even more striking than the lower multiples suggest since EBITDA has also fallen significantly for many businesses since 1999.

DuPont, which recently announced plans to buy publicly-traded ChemFirst Inc. for $408m, is effectively paying just 7.1x 2001 EBITDA for the aniline and electronic chemicals operations.

Today's low M&A valuations are certainly hampering the sale of certain assets as sellers wait to sell another day. "Companies that are seeking to sell for strategic reasons rather than financial necessity are really just holding their ground," says Bear Stearns' Zachariades. "That's why we've seen so many busted auctions such as Georgia Pacific with Georgia-Pacific Resins and International Paper with Arizona Chemical. They've taken those assets off the block."

Another problem with low valuations is that even if a seller is seeking to raise cash to pay down debt, it may not help the company's financial profile. "If you're already levered with debt in excess of 5x to 6x EBITDA, selling an asset for 6x EBITDA doesn't do you a great deal of good," Zachariades points out. "If you have taxes to pay, you may have even weakened your balance sheet."

Strategic buyers have also pulled back on larger acquisitions, preferring to take on small to mid-sized bolt-on acquisitions (ones that fit their existing businesses).

"A lot of buyers got burned in the 1990s by venturing too far from their core businesses, so they're sticking very close to their core competencies," says Thomas Courtney, president of New York City-based merchant bank The Courtney Group. "Boards of directors have pulled in their horns, becoming much more conservative about what to do in this environment. We have a client that had asked us to help them pursue six acquisitions, but recently their board told them to hold off and fix some issues they have in their existing operations."

One of the biggest obstacles to getting deals done is the higher uncertainty of earnings forecasts, says Young & Partners' Young. "If you lose confidence in profit projections, it's tough to do a deal."

Accounting issues thrown into the mix could also have an impact on M&A activity. "On top of everything else, now you've got to start worrying about the quality of financials that you otherwise would have relied upon," notes Bear Stearns' Zachariades. "It's just another headache to worry about. Nobody needs too many excuses not to do a deal these days. They already have enough."

The outlook for chemical industry M&A remains subdued. "M&A valuations will continue to be weak in 2002 and we'll likely see continued moderate volume activity leading to around 60 deals by year end (versus around 80 for 1999, 2000 and 2001)," says Young & Partners' Young. "Acquirers will continue to focus on close strategic fits, and financial buyers will try to expand their role in the US and Europe if the availability of debt financing opens up."

"The M&A market is very much driven by the mentality of CEOs - on how confident they are in their own business," says Bear Stearns' Zachariades. "I don't see any change in that right now and I don't see any great change for the remainder of the year."

(For additional Chemical Market Reporter analysis visit the CMR Web site at:

By: Joe Chang, Chemical Market Reporter
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