12 November 2003 17:47 [Source: ICIS news]
The rush of merger and acquisition (M&A) activity in chemicals in just the past week underscores increasing confidence in the sector. The going has been tough but even hard-nosed financial buyers have been able to negotiate seemingly favourable terms for assets showing growth potential.
It is still difficult to close in on a valuation and buyers active in the late 1990s, who paid relatively high multiples for cyclical and specialty businesses, are smarting. But the market is turning up. Deal activity will be fuelled in 2004 by the extensive corporate strategic re-thinking prompted by the downturn.
Industry buyers remain hard-pressed and the chemicals trough has tested the resolve of financial buyers but two have achieved exit in the past seven days: Ripplewood Holdings has sold Kraton Polymers to the Texas Pacific Group, and Permira has offloaded its 57% stake in distribution group, Azelis, to Electra Partners Europe. Both deals, in their own way, reflect the increased number of options open to companies and the executives who run them in a much more sophisticated chemicals deal-making environment. The sellers and buyers recognise that the needs of Kraton and Azelis have changed and that different times demand different investment profiles.
Ripplewood is selling Kraton for $770m (Euro671m), about 6.5 times EBITDA (earnings before interest, depreciation and amortisation), after buying it from Shell in 2001 from more than $500m. The styrenic block copolymers business is embarking on an expansion phase and plans to lift production capacity by as much as 20%.
Electra will be the sole venture capital backer for Azelis – put together aggressively as a company over the past two years by combining distributors from France, Italy, the UK and Germany. Azelis management will hold 43% of the group. The acquisition will greatly simplify the company’s ownership structure.
Over the next few months eyes will be on whether more deals such as this can be achieved and on the return of industry players to the M&A scene in more telling numbers.
The expected buyout of DuPont’s Invista, (formerly DuPont Textiles and Interiors) by Koch, the sale of Dynamit Nobel and the Akzo Nobel catalysts, resins and phosphorus businesses may set the scene for a more active period of M&A activity. But big deals involving corporate players are likely to be few and far between.
The pressure on balance sheets on the one hand is driving firms to divest non-strategic assets – or assets that have by necessity over the past 24 months become non-strategic. It is fuelling the interest of private money. On the other hand, tough times have made corporations more wary and by necessity more cost conscious.
As business sentiments improve, companies are more likely to look for strategic niche acquisitions that fill in gaps in the portfolio. The test of on-going corporate activity will be who comes back into the market, and when.
The old barriers to change still exist and the exit route for buyers of whatever persuasion currently is hardly easy. Nevertheless, if expectations of better times for the sector persist and are backed by real performance improvements then valuations will rise.
The field remains more open, however, for private equity buyers who are keen to spend more in chemicals following some relatively fallow years.
Financial buyer interest in chemicals was strong in 1999 (according to data from New York City-based investment bank, Young & Partners) and surged (in terms of the number of transactions) in 2000, rose again in 2001 but dipped sharply in 2002. There was some recovery in the first half of this year and that recovery has become more noticeable as the year has progressed.
However, it remains telling that in a forced seller environment there has been limited corporate interest in acquiring assets. About 20% of chemicals sector M&A deals worldwide in 2002 involved financial players. Pre-1999, that proportion was between 5% and 10%.
The Kraton and Azelis deals reflect one exit strategy for private equity firms involved with chemicals. The alternatives – sales to a trade buyer or an initial public offering are hardly viable at present. More such deals might, therefore, be expected as the chemicals world gains confidence and M&A driven restructuring once again gains ground.
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