INSIGHT: Specialties in vogue but no trend

14 July 2008 16:28  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Specialty chemicals are back in vogue. Dow’s agreed offer for Rohm and Haas, followed rapidly by Ashland’s bid for Hercules have seen to that. Both prove that deal making in troubled chemicals as well as financial times is possible and desirable.

It is desirable particularly as the sector heads for a downturn. Specialties, or what Dow sometimes likes to call “market-facing businesses”, provide a haven from cyclicality, although not necessarily margin pressure.

The businesses that Dow is buying into, and the water treatment market that is the main attraction for Ashland, bring with them the prospects of steady growth and safer margins.

Speciality assets, though, do not come cheap, with the multiple Dow is prepared to pay for Rohm and Hass 11.1 time enterprise value (EV) to earnings before interest, tax, depreciation and amortisation (EBITDA) according to Credit Suisse. Ashland’s bid for Hercules is valued at 8.4 times on the same basis.

The attraction of specialties asset currently is clear. Upstream the sector is heading for a supply-driven downturn but the tough times have come early as oil prices have nudged past $145/bbl and close to 50% above prices at the turn of the year.

Producers have been squeezed hard by rapidly rising feedstock and energy costs. The battle has been joined to push price increases down the chain to compensate.

Specialty chemical makers have not been immune from rising costs and the need to pass costs on to retain margins. Evonik on Monday said that it would apply a surcharge on its speciality polymers and monomers from 1 August to cover the rapid increase in feedstock, energy and transportation costs.

But these things are relative. And, as Credit Suisse has pointed out, the appetite for downstream assets different in different parts of the world.

The bank suggests that the Dow and Ashland deals represent a regional rather than a global trend – or at least one that might affect Europe in a significant way.

European chemical companies currently are more focused on share buy-backs and digesting recent deals than medium-to-large-sized specialties acquisitions.

Companies like DSM and Akzo Nobel have significant buy-back programmes in place following wide-reaching portfolio re-shaping.

Chemical companies may never say never but a reality check suggests that the Europe-based firms might be more likely to be happier with small bolt-on deals in specific market segments rather than portfolio re-shaping in a more drastic way.

Two announced deals in as many days reflects the industry landscape in the US as much as anything else. And it comes as no surprise given currency movements that deals appear to be region-specific, Credit Suisse suggests.

The two deals have prompted a review of sector companies and the suggestion from Citigroup that even the mighty Du Pont may be vulnerable to break-up. Mighty the company is not from a shareholder perspective, the shares having been essentially flat between 1998 and 2007, the bank suggests.

Just how do Du Pont shareholders feel seeing Rohm and Haas holders being offered a 74% premium? It calculates a break-up value for Du Pont of around $60 a share compared with the price at 10:14am local time on Monday of $41:28.

But do broken-up companies, or those that attempt to push further away from commodities into specialties, work? If the European experience is anything to go by the answer has to be no.

Wither the specialty assets of the once mighty Hoechst? Think of the way value was ultimately destroyed by the break-up of ICI? DSM is still trying to find its way following the divestment of petrochemicals. Evonik has followed a similar path but successfully divested a significant number of upstream businesses to focus on specialties.

Europe’s specialty chemicals sector companies currently are under-performing their peers in the US. Some of this is currency related but Credit Suisse notes that they are perceived as lower quality assets.

Europe probably has experienced its great wave of specialties M&A (merger and acquisition) activity.

The time now is largely for bedding-in recent buys or making forays into more attractive markets, such as those in the East and in Latin America.

To discuss issues facing the chemical industry go to ICIS connect

By: Nigel Davis
+44 20 8652 3214

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