16 February 2009 00:00 [Source: ICB]
While global chemical M&A activity will slow, a flood of distressed assets may soon hit the selling block. Who will take advantage?
IN THE "Let's Make a Deal" game, fewer people are playing and for smaller stakes - at least for now. Mergers and acquisitions in the chemical industry have taken a big hit as the financing market stays on the fritz, and business conditions continue to deteriorate into 2009.
But as the financial and economic crisis continues, more and more players will be forced or compelled to sell, putting a slew of new assets - big and small - on the selling block.
"The volume of activity has slowed considerably," says Peter Young, president of New York City-based investment bank Young & Partners. "Although most of the main drivers of M&A activity continue to persist, the financial and economic crisis has forced financial buyers more to the sidelines and will cause some industrial buyers to retreat as they focus on their own businesses and preserve cash."
In 2008, the global chemical industry completed $40bn (€31bn) in deals - down from $55bn in 2007, according to Young & Partners. The total was boosted by Netherlands-based specialty chemical firm AkzoNobel's $16.9bn acquisition of UK-based chemical major ICI.
The pace of activity also slowed to its lowest level in 13 years, with 55 deals over $25m in size completed in 2008 versus 81 in 2007, noted Young & Partners.
For 2009, Young sees chemical M&A dollar volume falling with less deals happening as a result of the prolonged debt crisis and a weakening economy.
"Operating results have gone from bad to worse and companies have a heightened focus on liquidity," says Leland Harrs, managing director of the chemical team at US-based KeyBanc Capital Markets. "Potential acquisitions are being looked at through a more critical lens."
"The market is fairly subdued, as most companies are reluctant to put businesses on the block. It's not just because valuations are down, but because there is a lack of motivated buyers," says Telly Zachariades, cofounder and partner of global chemical investment bank Valence Group. "Financial buyers are also sidelined, except in the sub-$500m deal category."
"The financing market is making it more difficult for M&A - impacting both strategic and financial buyers, but financial buyers to a greater extent," says Allan Benton, vice chairman and group head of the chemical industry practice at US-based investment bank Scott-Macon. "Strategic buyers, if they see something that fits well and have good balance sheets, will still be able to get deals done.
Indeed, all is not completely quiet on the M&A front. Smaller deals are still getting done - even some involving private equity buyers.
In January, Luxembourg-based private equity firm BluO acquired Swiss fine chemicals firm Rohner from Germany-based investment firm ARQUES Industries. The Rohner sale price was not disclosed, but it was part of a sale of three other assets to BluO for a total of $30m.
And in February, private equity firm International Chemical Investors Group (ICIG) bought Italy-based fluorine intermediates and specialty chemicals firm Miteni from Mitsubishi and other investors.
"Most of the activity is mid-market deals. We're still seeing a lot of activity and across all sectors," says Chris Cerimele, managing director and co-head of chemicals at global investment bank Lincoln International, which represented ARQUES on its sale of Rohner. "There are lots of assets being made available by motivated sellers."
The fine chemicals arena could become hot for M&A, according to Jean Cayanni, senior managing director and head of the chemicals practice and capital raising at US-based investment bank McGladrey Capital Markets.
"Fine chemical companies are not doing badly - the mood at Informex was not so bad," says Cayanni. "These companies are still interested in buying assets."
While large deals are difficult to finance, those under $200m can still get financing, notes the banker.
"Billion-dollar acquisitions are difficult because you have to tap the syndication market, which is not there. But with deals up to $200m, you can do a club deal, where two or more banks get involved, providing senior bank debt and/or asset-based loans," says Cayanni.
The nature of the M&A game has changed, and become more intimate during the downturn and financial crisis, according to Lincoln International's Cerimele.
"The days of broad-reaching investment bank-run auctions are on hold," Cerimele says. "Deals are now getting done with one-on-one talks, or with a small group of obvious potential buyers. If you have a healthy asset and the right group of buyers, it's not unheard of to get decent multiples."
And while many potential sellers may be sitting on the sidelines to avoid selling on the cheap, others need to sell - either to raise cash for upcoming debt maturities or otherwise improve their liquidity in a severe downturn.
"Some will choose to pull assets from the market or not put them on, but some have no choice," says Young.
"Some companies need to sell to raise cash or prune their portfolios," says Cerimele. "These sales are not motivated by price, but the need to do the transaction."
"As companies seek to preserve cash and liquidity, we are going to see more asset sales - some to address pending maturities," says Tim Wilding, managing director and head of chemicals at US-based investment bank Oppenheimer. "One lesson is that as a chief financial officer, the number-one rule is that you should always push your debt maturities out. You should never have debt maturing in three to four years."
"If you're a seller, you probably only want to do it if you have to," says Zachariades. "If you had a choice you probably wouldn't want to sell today, unless it was a relatively small business. In any event, a highly targeted sale process is the way to go."
M&A has shifted to a buyer's market, says Omar Diaz, senior vice president and co-head of chemicals at US-based investment bank Houlihan Lokey. "However, there still needs to be a change in seller psychology. Many of the sellers out there still have inflated valuation expectations and have not adjusted to the new world."
And more distressed assets will hit the selling block as leveraged companies restructure.
"Companies that were leveraged buyouts (LBOs) can only go through so many covenant resets before they eventually have to deal with that day of reckoning where they have to restructure the company - either through asset sales or in a bankruptcy where the bondholders will wind up owning the company," says Diaz.
DOW TO SELL TO MAKE A BIG BUY
Following the collapse of its planned K-Dow joint venture with Kuwait's Petrochemical Industries Co. (PIC), Dow's commodity assets are on the block.
Dow chairman and CEO Andrew Liveris said on the company's fourth quarter conference call on February 3 that there were more than a dozen potential bidders for its basic plastics and chemicals businesses.
"We have 12 assets that we are working on right now - including the K-Dow assets - of varying sizes, with divestment teams and also investment banks to work out which ones are realizable," Liveris said. He did not name the assets.
Dow's asset sales may not be limited to commodities. One prize asset that could be available is Dow Agrosciences.
"Dow is now contemplating the sale of specialty assets to satisfy the conditions of the Rohm and Haas deal," says JPMorgan analyst Jeffrey Zekasukas. "With Lyondell in bankruptcy and other peers possibly approaching bankruptcy, Dow's opportunities to monetize its own commodity assets, such as basic plastics, at attractive prices are probably especially limited. Based on management comments during the [fourth quarter] conference call, we believe the company could now be turning to the exploration of a sale of its agricultural asset."
Dow's AgroSciences posted sales of $4.5bn in 2008 with earnings before interest and tax (EBIT) of $761m.
"Dow seems to be sacrificing a lot to get the Rohm and Haas business - you wonder what it is they're buying," says one source.
And more restructurings through the downturn will also put assets on the selling block.
Earlier this month, Germany-based BASF announced it is reviewing strategic options for its leather and textile chemicals business. These include joint venturing or selling the business outright.
BASF's leather and textile chemicals business had sales of around €400m in 2007 and employs about 1,300 people with production plants in Germany, Spain, Turkey, Brazil, India and China.
During the downturn, defensive mergers may also arise, as companies seek combinations to cut costs and improve competitiveness.
"I foresee companies coming to the table to discuss mergers or joint ventures out of necessity," says Oppenheimer's Wilding. "It's almost a life or death kind of thing - that we should put these businesses together and figure out a way to take out costs. Where up until last year, mergers were about driving top-line and earnings growth, it's now going to be about surviving and cutting costs."
Valence's Zachariades sees more joint ventures, PIPEs (private investment in public equity) and stock-for-stock deals going forward.
"There are a lot of public chemical companies that are undersized, and I think you'll see players combining their resources in this tough environment in order to better position themselves for the eventual upturn and perhaps even make some consolidation moves," he says. "You will also see private equity firms bolstering balance sheets by making significant minority investments in public companies."
"There are significantly undervalued publicly-traded chemical companies now, and so if a board of a company being targeted might be more likely to approve a transaction that has a share component, realizing that the shares they're getting are also likely to be as undervalued as their company," says Scott-Macon.
Stock-for-stock deals have been scarce in the chemical industry. The last major deal of this kind was Chemtura's merger-of-equals with Great Lakes Chemical back in 2005.
ASIA AND MIDDLE EAST BUYERS
The chemical M&A market has shifted in recent years more towards Asia, the Middle East and Latin America versus the traditional grounds of North America and Europe.
In 2008, Asia and the Rest of the World category took the lead with 38% of the total number of chemical deals, compared to 35% in Europe and 27% in the US, according to Young & Partners.
"Up until four to five years ago, companies in Asia and the Middle East were building plants rather than buying companies," says Young. "M&A happens when industries reach a certain stage of maturity. I expect more deals in these regions."
Houlihan's Diaz sees more buyers from Asia and the Middle East coming to the table to look for assets in the US and Europe.
"If anyone still has cash in the world, those folks are sitting in Asia and the Middle East," says Diaz. "We're going to see Japanese companies becoming more aggressive - not only in pursuing their traditional joint ventures, but also full-on M&As as well."
WILL EQUITY MARKETS OPEN UP?
If business conditions improve and stock prices turn up, companies may get a chance to put more equity into their capital structure and reduce debt some time this year or early next, predicts Oppenheimer's Wilding.
"I think the public equity market will open up to allow recapitalization of overstressed balance sheets," he says. "I see equity issuance being contemplated by public companies as well as potentially the IPO [initial public offering] market for private companies."
CHEMTURA BUSINESSES ON THE BLOCK
US specialty chemical producer Chemtura has put its crop-protection and petroleum-additive businesses on the selling block, according to sources in the financial community.
"Chemtura's ag business is being shopped by Merrill Lynch, and petroleum additives by Citigroup," a source says. "It's something of a race, as the company is looking to have at least one deal soon. But if they get good prices for both assets they might sell both."
Chemtura has $370m (€285m) in debt maturing on July 15, and has been hit by investor concerns about bankruptcy, sending its stock price to around 50 cents, from a 52-week high of $8.81.
The sale of the crop-protection business could yield Chemtura $700m-1bn, sources say.
Through the first three quarters of 2008, Chemtura's crop-protection segment posted a 58% gain in operating profits to $63m on 17% higher sales of $306m.
Potential buyers include agricultural-chemical players such as Switzerland-based Syngenta, US-based FMC, Japan's Mitsui Chemicals, Israel's Makeshtim Agan and Austalia's Nufarm, sources say.
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