30 December 2009 20:34 [Source: ICIS news]
NEW YORK (ICIS news)--Mergers and acquisitions in the global chemical industry are poised to make a comeback in 2010 after hitting bottom in early 2009, according to investment banks.
"We will see a meaningful increase in the number of deals in 2010, driven by greater financial stability and an improving financing market," said Peter Young, president of investment bank Young & Partners.
"The chemical M&A market bottomed in Q1 2009 and activity has been picking up ever since," he added.
On a global basis, the number of completed chemical deals over $25m (€18m) in size on an equity basis rose from four in the first quarter to seven in the second quarter and eight in the third quarter of 2009, according to Young & Partners.
However, three big deals announced in 2008 - US-based Dow Chemical’s acquisition of specialty chemical giant Rohm and Haas, German major BASF’s buyout of Swiss specialties firm Ciba and Japan’s Mitsubishi Rayon’s purchase of UK-based methyl methacrylate (MMA) producer Lucite International - accounted for about $20bn of those closed transactions through the third quarter, noted Young.
The final 2009 tally was unlikely to exceed $30bn, he said.
But 2010 was expected to show improvement. Some deals that were put on ice through the global economic recession in 2009 might revive next year.
"There will be a good amount of activity in 2010," said Tim Wilding, managing director and head of chemicals at US-based investment bank Oppenheimer. "While deal flow could come from a number of sources, there is a healthy backlog of postponed transactions that could be relaunched in 2010."
US-based chemical M&A specialist Leland Harrs also expects a gradual recovery in the M&A market in 2010.
"Well-capitalised corporates are looking for selective acquisitions that are close to their core businesses," said Harrs.
"They will likely use some of their financial flexibility to stimulate growth through bolt-on acquisitions in the $50m-$200m range," he added.
Importantly, the financing market has improved significantly since the depths back in March 2009. Stabilisation or further improvement could spur another wave of deals.
"The financing market has vastly improved and is open and active for both equity and debt issuance," said Wilding.
"Investment-grade buyers have access to very attractive financing rates and once there is more certainty on the economic and earnings front, this could spur deal activity," he added.
And even the high-yield debt market, which is critical for private equity firms to fund acquisitions, is coming back.
Through the first three quarters of 2009, private equity buyers of chemical assets accounted for only 5% of the number of completed deals and 0.2% (disclosed deals) of the dollar volume, according to Young & Partners. This compared to 22% of the number of deals in 2007 and 15% in 2008.
Oppenheimer’s Wilding said: "While financing terms are more strict, with a greater amount of equity required for buyout financings, I don’t see this as a major impediment to deal activity for most transactions if there are realistic valuation expectations."
Harrs noted that through 2009, private equity players have been more active buying up debt securities at discounts versus making acquisitions.
"M&A has not yet been seen by private equity as the best opportunity," he said.
One challenge that remains is the lack of available assets in the pipeline as M&A valuations have not prompted companies to sell, said Harrs.
"We’ve seen a strong recovery in public valuations to historical EBITDA [earnings before interest, taxes, depreciation and amortisation] multiples of around 7-9 times, but have not seen this translate into the M&A market," Harrs said.
"Multiples have not improved to the point where sellers have been compelled to go to market, but this will gradually happen in 2010," he added.
And while some big chemical deals are in the works such as Indian major Reliance Industries bidding for Dutch petrochemical giant LyondellBasell in bankruptcy, and Japan’s Mitsubishi Chemical planning to buy Mitsubishi Rayon, these are not being viewed as indicative of an overall return to mega deals.
"It is too early to draw conclusions from the Reliance/LyondellBasell situation as the Reliance offer is a preliminary non-binding offer at this stage and there are other alternatives that LyondellBasell is considering. And the Mitsubishi deal is a special situation where the Japanese chemical industry is continuing to rationalise as it has been for many years," said Young.
"Many of the largest chemical companies are focused on priorities other than doing a large deal, and the financial buyers are still impaired by a weak financing market. Thus, there is no obvious impetus to do larger deals," he added.
($1 = €0.70)
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