Corrected: OUTLOOK '08: M&A activity set to slow

28 December 2007 14:41  [Source: ICIS news]

Correction: In the ICIS news story headlined “OUTLOOK ’08: M&A activity to slow after record ‘07” dated 28 December, 2007, please read in the twentieth paragraph …Hexion’s owner Apollo Management … instead of Hexion’s owner Access Industries…. A corrected story follows.

 

LONDON (ICIS news)--The total value of mergers and acquisitions (M&A) in global chemicals has been consistently high throughout 2007, driven by several multi-billion dollar deals, but investors are heading into a period of economic uncertainty where large acquisitions can be a risky business.

 

With the major takeovers of ICI, Lyondell and Huntsman set to close this winter, all eyes are on US major Dow Chemical, which will gain a $9.5bn (€6.5bn) war chest from its plastics joint venture with Kuwait’s Petrochemical Industries (PIC).

 

Even during the debt market turmoil in the second quarter, the M&A market proved to be resilient in 2007, with deal value for the first three quarters surpassing the total for 2006.

 

According to a report by financial services firm Pricewaterhousecoopers (PwC), there was $88bn worth of deals in the first three quarters compared with $51bn in 2006.

 

Deutsche Bank analyst David Begleiter said 2007 has been a record year for M&A activity, though the current environment is richly priced.

 

“Due to the tight credit market there should be a less active market in 2008,” he told ICIS news.

 

There is an increasingly negative outlook for the credit quality of North American companies, with Moody’s ratings service warning that time is running out for a sizeable number of companies with high-leverage.

 

“It is reasonable to believe that relative bidding leverage has increased for strategic bidders as the debt market turmoil has altered the financing landscape that fuelled private equity over the past several years,” said a PwC report.

 

PwC said the current market dynamics have not impacted deal activity as much as anticipated, but deal processes may have been affected.

 

Deals carried out by financial investors have decreased throughout the year, with 87% of acquisitions done by strategic investors - companies linked with chemicals - in the third quarter.

 

However, PwC said that in some of the bidding processes, financial bidders influenced the prices, causing strategic bidders to pay more to win.

 

US chemicals major Dow Chemical will receive up to $9.5bn in potential acquisitions funds after it recently announced it would put several commodities businesses into its joint venture with Kuwait’s PIC.

 

Dow’s chief executive Andrew Liveris said the proceeds would give the company extra firepower to buy companies with faster-growing specialty chemicals assets.

 

Rumours have already started in the financial community around potential large acquisitions the Midland, Michigan-company could make in the new year, with Air Liquide and Johnson Matthey thrown into the ring as potential targets.

 

“The M&A environment is richly priced on the evidence of recent transactions,” said Begleiter.

 

“Given Dow’s financial discipline they will have a hard time financing a large transaction….there is no logical target given the breadth of Dow’s portfolio,” he added.

 

“Most rumours are linking Dow with large public companies in North America and Europe but these are the least likely. It would be most interested in acquisitions in Asia but these are limited and richly priced.

 

This year’s M&A activity was dominated by four deals involving some of the industry’s biggest players.

 

Three large American producers were snapped up in 2007. Basell made a successful $19bn takeover bid for Lyondell after its proposed acquisition of Huntsman fell through.

 

Huntsman instead accepted a $10.6bn offer from Hexion’s owner Apollo Management, while Saudi Arabia’s SABIC continued its exceptional rise in status with the $11.6bn takeover of GE Plastics.

 

The most attention fell on Akzo Nobel’s drawn-out acquisition of coatings rival ICI, which it managed at £8bn ($16bn) after two unsuccessful bids.

 

The deal is expected to be finalised on the first working day of the new year, with Akzo Nobel forced to divest several decorative coatings businesses to please the competition authorities.

 

PwC highlighted the shift from a European focus in 2006 to the emergence of Middle Eastern acquirers this year – such as SABIC, PIC, Abraaj, and Cristal.

 

With the lower cost of raw materials, strong economic and booming chemicals industry in the region, this is a trend is sure to continue into 2008 and beyond.

 

($1 = €0.68)


By: Mark Watts
+44 20 8652 3214



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