Analysis: Valuation fears slowing chem M&As to trickle

18 October 2002 17:00  [Source: ICIS news]

NEW YORK (CNI)--The pace of mergers and acquisitions in the global chemical industry remains sluggish, with smaller deals the order of the day and just $2bn (Euro2.04bn) worth of deals in the third quarter compared with $14bn in the second.

Those figures from New York's Young & Partners indicate that industrial buyers are holding back in uncertain economic times while financial buyers find themselves increasingly stymied by a stringent financing market.

The investment bank sets this year's total at $18bn - a number down 42% from levels one year ago. And the decline comes despite ongoing restructuring in Europe and an abundant supply of assets for sale,

"We're at a trough in valuations, but the volume of activity is still relatively high versus the last trough in 1991," said Peter Young, president of Young & Partners. "You have adequate supply because some companies have no choice but to sell assets. And, while valuations have come down, they have not fallen to catastrophic levels, so we're still seeing some deals getting done."

Young projects a total of $20bn-25 bn in completed deals for 2002 - an anticipated decline between 29-43% from the $35bn recorded last year.

But the total number of deals over $25m in size is expected to come in at between 60-70, only 10-15% lower than peak year volumes.

The biggest challenge to completing deals is the uncertain profit outlook of the target companies. "It just comes down to the poor visibility on the economic outlook," said Omar Abboud, managing director and head of global chemicals at Lehman Brothers. "When people try to figure out whether or not to pursue a strategic transaction, they try to evaluate the business they're thinking about acquiring or selling. And if they don't have a good view of what the earnings are going to look like, they don't have a good view of what they think it's worth."

A big second quarter included the closing of large deals such as Bayer-Aventis CropScience for $6.64bn, Sabic-DSM's petrochemicals business at $1.99bn, General Electric-BetzDearborn for $1.8bn, Johnson Wax-Diversey-Lever at $1.56bn and Solvay-Ausimont for $1.16bn.

After a big showing in 2000 and 2001, financial buyers have been quieter this year.

Last year, 18 chemical transactions involved financial buyers for 23% of the total, according to Young. In contrast, through the first three quarters of this year, financial buyers won only six deals for 12% of the total.

Said Young: "Financial buyers will continue to have a role in both the US and Europe, but they are being held back by restricted availability of debt financing."

That financing market has deteriorated somewhat from the second quarter, according to Telly Zachariades at Bear Stearns.

He said: "There's a queue of transactions coming through in the high yield and bank financing side across all industries, which is causing some indigestion."

Zachariades noted this environment makes it harder for industrial and private equity buyers to raise debt to finance acquisitions.

Looking ahead, any near-term increase of M&A activity may not be driven by traditional reasons such as improving profits via synergies, but more by companies being forced to shed assets to maintain adequate liquidity.

Abboud said: "We are actually seeing signs of a pickup. Certain companies are being forced to sell assets just because of liquidity issues. A lot of companies that have recently refinanced have done so with such stringent terms that they really have no flexibility whatsoever."

He also cited the recent decline in chemical equity prices as another factor driving companies to sell assets.

Abboud said: "Earlier in the year, a number of companies sold equity instead of assets to get better liquidity. However, I think we're at the point now where more companies are going to look to sell assets."

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

By: Joe Chang, Chemical Market Reporter
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