Large Q1 M&A activity falls on economic fears - PwC

14 May 2009 16:49  [Source: ICIS news]

Hexion could pay millions to abandon Huntsman mergerHOUSTON (ICIS news)--Large M&A deal activity within the global chemicals industry dropped sharply in the first quarter, down 30% from the fourth quarter and down 55% from a year earlier due to concerns over diminished demand and liquidity, US accounting firm PricewaterhouseCoopers (PwC) said on Thursday.

The quarterly report cited 58 proposed first-quarter transactions with a disclosed value of greater than $50m (€37m).

Overall, 143 deals were announced in the quarter, a 31% decline from the prior quarter and a 7% decline from a year earlier, the report said.

“The high cost of capital, tight credit markets and general decline of the global economy has continued to take its toll on the chemicals sector,” said Saverio Fato, global chemicals leader for PwC.

Chemical companies were particularly concerned by the continued downturn in the automotive sector, a crucial end-use market for many plastics makers.

According to the American Chemistry Council (ACC), each automobile has an average of $2,700 in chemistry.

“Many of PwC’s chemicals sector clients are telling us their exposure to the automobile industry has proved greater than they realised, and that structural changes within the automotive industry are imposing corresponding structural changes upstream in the supply chain that endanger a large swath of the industry,” the report said.

Moreover, anticipated improvements in auto demand from the stimulus packages would likely be limited, PwC said.

“The stimulus plan has limited direct impact on an automotive sector that is largely driven by consumers’ wealth, income and credit availability,” the report said. “Any benefit will be derived from the psychological effect on consumer confidence.”

Despite the economic fears, the average value of first-quarter deals rose slightly, to $176m from $148m in the prior quarter.

“A relatively high amount of small to mid-sized deal announcements - combined with a few large deals - contributed to deal value, which has now improved from late 2008,” Fato said.

PwC said smaller deals could become popular as some companies position themselves for the eventual economic recovery. According to PwC, the destocking of the supply chain and removal of production capacity may offer opportunities.

“Companies that carefully manoeuvre themselves into strong positions may be rewarded during the recovery period by an improved supply-demand balance in segments where capacity it not brought back on-line following economic recovery, making the upside potential of certain acquisitions very attractive,” the report said.

For the first quarter, Asia captured the majority of deal volume, with 45% of transactions. North America was second at 33%.

PwC said that Asia’s strong volume was largely due to China, where several chemical executives have said demand was improving due to government stimulus measures.

The largest proposed deals of the first quarter both involved US fertilizer producer CF Industries. One was CF’s $3.48bn bid for rival Terra Industries, while the other was Canadian firm Agrium’s $4.38bn takeover effort to acquire CF. Both are still pending.

Those deals, all involving North American countries, helped to drive down the proportion of inter-regional deals in the first quarter to 22%, compared with an average of 42% from 2006 through 2008.

This contradicts PwC’s prediction heading into this year, when it said it expected an uptick in international deals to occur in 2009 due to low-cost infrastructure available in foreign markets.

($1 = €0.74)

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By: Ben DuBose
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