INSIGHT: Industry attention shifts to smaller deals

19 May 2009 17:21  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--The big deals are not being done but data from PricewaterhouseCoopers (PwC) suggests that merger and acquisition (M&A) activity across the chemicals sector is alive if not particularly well.

In such difficult times it is hardly surprising that high value deal making has taken a back seat. One major recent influence on chemicals M&A – private equity – is largely absent. Companies may want to implement strategy but they – and the banks willing to lend to them – are focused on survival.

The PwC data show that the number of announced deals with a value of more than $50m was down 55% year on year in the first quarter. But the average deal value was higher at $176m (€130m) versus $148m.

The decline in the total number of deals for the sector, however, was not much lower, at -7%.

The troubled global economy and the tight credit and capital markets have clearly taken their toll across the sector but the business advisers, in their latest chemicals sector report, point to a “relatively high” number of small to mid-sized deal announcements.

These smaller deals, coupled with more significant bids in the fertilizer sector, involving CF Industries, Terra and Agrium, contributed to deal value which was higher than in the final quarter of 2008. (Dow’s Morton Salt deal with Kali & Salz was announced in April; the IPIC purchase of Nova was valued at $500m).

The largely North American deals aside, deal-making in Asia has been most pronounced with China and India leading the way in domestic and international ventures.

Outside investment into China has been relatively strong while China companies’ interest in investments abroad has continued at a low level. Interest in India appears to be on the decline, a consequence perhaps of more companies generally wanting a foothold in China markets.

The baton has clearly passed from the financial investor to industry. Private equity had oiled the wheels of chemicals M&A activity in 2007 and 2008 and helped foment more widespread sector restructuring. Now, however, strategic investors are the primary deal-making force.

Their activity is likely to underpin sector M&A through this year and into next although the situation is changing.

Money supply constraints are easing and debt is more readily available. Deals may be done but the equity portion will be greater than before.

The expectations of sellers have come down too to more like two to three times cycle EBITDA (earnings before interest, tax, depreciation and amortisation) averages from closer to four to five times, consultants say.

Tightening credit markets caused financial buyers to increase their equity stakes from 32.9% in 2007 to 42.6% in late 2008, according to Standard & Poor’s data.

It has consequently become more difficult for financial buyers to use leverage to consummate larger deals.

Yet the colour of chemicals M&A is also changing: or at least it is likely to change as companies that find themselves in some financial difficulty seek to divest assets.

The large chemical companies under bankruptcy protection, and possibly some others, will want to sell to help pay off debt finance.

For those under Chapter 11, divestments may, indeed, be required if they are to emerge quickly from under the umbrella of the courts.

Such companies may provide good buying opportunities for investors able to identify and acquire the viable parts of these businesses, says PwC.

($1 = €0.74)

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By: Nigel Davis
+44 20 8652 3214

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