OUTLOOK '09: Shift ahead in global M&A amid credit crisis

31 December 2008 10:46  [Source: ICIS news]

By Mark Watts

LONDON (ICIS news)--“Huntsman is not for sale – not in today’s market. The M&A market is basically shut down,” Peter Huntsman declared after Huntsman’s proposed $6.5bn (€4.6bn) merger deal with private equity-owned Hexion Specialty Chemicals broke down.

The Huntsman-Hexion merger collapse epitomised the way the market for mergers and acquisitions (M&A) has shifted since the credit crisis hit.

The deal was proposed near the top of the up-cycle in petrochemicals but has become a victim of the global downturn, with Hexion maintaining during legal proceedings that the merged firm could soon become bankrupt.

Total deal volumes in 2008 were expected to be well below the previous year, according to analysis by PricewaterhouseCoopers (PwC).

Global chemical deals were worth $48bn up to the end of the third quarter compared with $119bn in the full year of 2007.

Nearly a third of deal value over the nine month period was for one deal, Dow Chemical’s acquisition of US specialty chemicals player Rohm & Haas, which PwC valued at $15.5bn.

However, following the recent collapse of the K-Dow deal, Bank of America said this acquisition could now be at risk due to a lack of available cash from the failed joint venture with Kuwait's Petrochemical Industries Company.

Although the credit squeeze has impacted the power of private equity and highly-leveraged producers in M&A, this should give cash-rich industry players new opportunities to make strategic buys.

PwC said large strategic investors acted as the major financers of deal activities in the chemicals sector, accounting for over 80% of deal value accumulated during the first three quarters of 2008.

“Clearly the outlook for chemical and energy deals has changed dramatically during the past 18 months,” said chairman of Houston-based consultancy Pilko & Associates George Pilko.

“It has shifted from a strong sellers' market dominated by private equity buyers, to a buyers' market where strategic buyers with cash, debt capacity or other ‘currency’ can negotiate attractive bargain,” said Pilko. 

Pilko added that Asian and Middle East buyers would dominate the market due to fewer obstacles in obtaining funding for the deals. These producers are typically willing to take a long-tem strategic view of acquisitions to increase technology portfolios and human resource bases.

PwC found, however, that although Asia had dominated the third quarter deal market with over 40% of total deals, it only contributed to 20% of total deal value, while North America accounted for 54% the total M&A value.

There was also expected to be an increase in the number of forced sales as a result of financial restructurings and bankruptcies. A growing number of companies could be forced to sell distressed assets as the impact of the global recession takes hold.   

“For corporate buyer with some cash funds behind them there might be some real bargains out there in the foreseeable future” said PwC chemicals leader Richard Bunter.

“We also see companies who are looking to dispose of assets but don’t want to go into a fire-sale situation,” he added.

Some producers have been vocal about using the downturn to get bargain buys.

In late December US specialty chemicals producer Albemarle said it was building up cash reserves to take advantage of upcoming acquisition opportunities in the weak economic and market conditions.

“We believe the shake-out is already underway … we plan to be ready and opportunistic,” said CEO Mark Rohr.

Paul Satchell, chemicals analyst for Dutch investment bank ING, predicted that the huge scale in demand uncertainty in chemicals markets would be the main factor limiting M&A activity in 2009.

“Access to capital is an issue for people involved in M&A but I think the dominant issue will be that no one knows where demand is going. Not even a one month view, never mind an annual view,” said Satchell.

Companies have been using so many resources to deal with the downturn they would find it difficult to manage the integration of new businesses, he added.

“Apart from picking out a target and trying to finance it, most companies are occupied trying to run the ship at the moment,” said Satchell.

Although the acquisitions market may be all-but-closed in the near term for the majority of producers, big moves by cash-rich players cannot be ruled out.

Acquisitions should be scarce in 2009 as the credit crunch takes its toll, but competition will also be scarce for opportunists willing to take risks.  

($1 = €0.71)

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By: Mark Watts
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