INSIGHT: M&A frenzy but market favours the brave

20 July 2007 17:19  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--There is a growing feeling that the party may soon be drawing to a close.

In a week when Basell’s owner Len Blavatnik agreed to put $19bn on the table for Lyondell, BASF said it was mulling over an offer for its difficult commodity styrenics businesses and NOVA Chemical was put in the M&A frame by some analysts, chemicals merger and acquisition feeding frenzy was in top gear.

Expect some more excitement. Akzo Nobel has yet to signal its real intentions regarding ICI after Britain’s takeover panel said it has until 9 August to act.

Paint maker PPG said on Thursday it would pay $€2.2bn ($3.0bn) to Bain Capital for Netherlands-based coating player Sigma Kalon.

Industry players want to consolidate fast – and while they can. Deal values are high and have opened up new opportunities.

Basell is estimated to be paying 11 times normalised EBITDA (earnings before interest, tax, deprecation and amortisation) for the integration-related delights of Lyondell.

BASF clearly sees the chance to focus on the better prospects of polystyrene foams and distance itself from the difficult styrene monomer, polystyrene and ABS (acrylonitrile butadiene styrene) businesses.

Money has been cheap and plentiful as private equity funds and others with cash to burn stay on the look out for more places to invest.

But the window of opportunity is closing fast.

Concerns are mounting over US sub-prime mortgage lending. Uncertainty on the debt markets is beginning to favour strategic buyers. Cash flows are high – not just in the chemicals sector – and companies are encouraged to be more creative in their use of debt.

Rohm and Haas said this week, for instance, that it will issue new debt to finance part of its latest massive $2bn share buy back scheme and was rewarded with a sharp stock rally.

The momentum behind business and the financial world is significant but oil prices climb ever higher and political unrest fills the news media. One world is not divorced from the other.

Political storms can be ridden; spectacular growth in China and India can dampen the impact of higher priced oil but more commentators see clouds on the financial horizon.

The chemical industry will not be immune to fiscal trends. Riding on a cash flow plateau and in a world where product prices are high and supply/demand balances strongly positive it is easy to feel satisfied.

But circumstances can change quickly and a world of easy choices can soon become much more restrictive.

Sector players are not there yet. There is some concern among the rating agencies over the level of increased chemical company spending but demand growth projections are positive. There are few warnings as yet.

Further consolidation in chemicals is achievable and the owners of some assets might still be able to sell them at a healthy premium. But the good times may not last that much longer. Companies need to capitalise while they can on current market conditions.

($1 = €0.72)

By: Nigel Davis
+44 20 8652 3214

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