INSIGHT: Chemicals M&A down but not out

20 September 2007 15:49  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--The brake put on all deals by global financial contagion may not be likely to lift anytime soon but the impact on chemicals merger & acquisition (M&A) could be mixed.

Chemicals M&A activity peaked in 2006/07 with the availability of funds matching the willingness of firms to sell at or near the top of the cycle and others to buy.

Given the current credit crunch sellers may not be keen to go to market: particularly with half the potential acquires absent. Private equity is finding it increasingly difficult if not nigh on impossible to syndicate debt.

Industrial players, though, believe they have a stronger hand.

Healthy cash flows for close on three years mean that companies have the wherewithall to be more aggressive in the acquisition market. The debates over what businesses are worth, however, will doubtless continue to rage.

The reaction of Akzo Nobel shareholders to its proposed $16bn purchase of ICI is a case in point.

ICI will not come cheap. Indeed, sector deal multiples have peaked.

The price Access Industries and Basell expects to pay for Lyondell is close to 11 times normalised EBITDA.

Now debt has become more costly acquirers will have to pump more equity into deal structure.

It is not surprising then that some potential acquirers say much more forcefully that they are not prepared to overstep the mark.

Axel Heitmann of Lanxess was one such CEO on Wednesday when he said that while Lanxess wanted to expand it was not prepared to do so at any price.

Lanxess probably has a bid level of under €1bn ($1.4bn) in mind.

The company wants to grow having cut back to a portfolio of businesses that are currently said to be performing at acceptable levels.

 “We don’t plan on following in the footsteps of some of our competitors, which made overpriced acquisitions years ago and have since paid dearly for their mistakes in the form of low margins and declining competitiveness,” Heitmann said. He added that the firm will only act when the time is right.

Relatively strong multiples, however, might still be expected given the continued strength of the chemicals cycle. Bulk chemicals producers, particularly, have been raking in cash.

Much stronger cash flows in segments such as fertilizers suggest that more deals might be in the offing.

The obvious constraints to deal making prompted by the global credit clampdown are one thing. But bankers believe that chemicals sector deals of under $1bn can be completed relatively easily.

Bigger deals also are possible despite what some have called the global financial market meltdown.

This may be the time to leverage much stronger corporate cash flows.

BASF chief financial officer and head of its US business, Kurt Bock, was quoted earlier this week as saying that the chemicals giant could take on a further €10bn in debt to finance acquisitions.

The company produced huge cashflows last year and an EBITDA of close to €10bn. In that situation, doing something with that cash in a world where you can as much be the target of an acqusition as an acquirer can become critical.

Bock’s comments underscored the fact that the raised cost of borrowing may be deterring private equity firms and leveraged buyouts but industrial players remain in a strong position.

“If you are ready to fire and your powder is dry you probably should do it,” Bock was reported by the Wall Street Journal Europe as saying.

The company must be encouraged by the acquisitions it made successfully last year, including those of US-based catalyst make Engelhard and Degussa’s construction chemicals business.

BASF wants stronger but steadier growth. A customer-oriented chemicals acquisition, possibly in the US, cannot be ruled out. A company of BASF's size and breadth would want to expand further in Asia and possibly tie-in more vitally important feedstocks.

The chemicals sector remains highly fragmented and well capitalised companies can continue to make their mark.

Expect further consolidation in chemicals over the coming months. Cash rich companies can still step to the plate.

By: Nigel Davis
+44 20 8652 3214

< previous article(VIDEO - ICIS news Europe Lunchtime Bulletin 27 October 2009)

For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.

Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.

Printer Friendly