FocusStrategic buyers to lead chemical M&A recovery

08 February 2010 17:22  [Source: ICIS news]

Strategic buyers to lead M&A recoveryBy: Joseph Chang

NEW YORK (ICIS news)--Strategic buyers are likely to lead the recovery in the global chemical mergers and acquisitions (M&A) market, investment bankers said on Monday.

“There’s a lot of money on the sidelines. Strategic buyers sat out the worst of the meltdown and are about ready to come back and start buying assets again,” said William Breen, managing director of US-based investment bank National Capital Companies.

“It’s a good time to buy because transaction multiples are down, and what you multiply that with – [EBITDA] is also down. There should be some deals out there,” Breen said.

The banker sees small to mid-size specialty chemical deals at $200m (€146m) or under happening at multiples of 5-6 times EBITDA (earnings before interest, tax, depreciation and amortization) versus 7-8 times or even double-digit multiples in peak times.

Some deals under $100m in size are getting done at about 4 times EBITDA, he adds.

“We are continuing to see more corporates wanting to make acquisitions,” said Telly Zachariades, cofounder and partner of investment bank Valence Group.

“US-based companies such as Eastman, Cytec and Albemarle, that have been through the worst of the down cycle and emerged relatively unscathed, have managed to accumulate significant cash on the balance sheet and are now ready to pull the trigger,” he added.

Where growth opportunities are limited, some companies may force the issue on M&A.

US industrial gases company Air Products announced an unsolicited offer to acquire Airgas for $60/share, or $7bn, including $1.89bn of assumed debt.

On the sell side, chemical companies are reviewing their portfolios and deciding which businesses fit into their long-term strategy and which do not.

“Almost all companies have orphan businesses that are not officially for sale, but I think you’ll see more come on the market,” said National Capital’s Breen.

“But the flip side of the coin of a good time to buy is that it’s not necessarily a good time to sell,” he added.

However, sellers are seeking opportunities for businesses that are truly non-core.

“You sometimes have to sacrifice a pawn to advance on the board,” said Valence’s Zachariades in reference to exiting non-core businesses at perhaps depressed prices.

“While it may not be the best time to sell, you don’t want to have to wait for several years in order to execute your strategy. Plus, sellers are beginning to realise that buyers have cash and there is a lack of quality assets for sale,” he added.

“Many companies would like to buy, financing has improved, but the supply [of assets] is just not there yet. But it’s early days,” said Leland Harrs, managing director of investment bank PrinceRidge Group.

US-based Dow Chemical is targeting $2bn in divestitures in 2010. It aims to sell its Styron styrenics assets among others.

Plus, it continues to embark on its asset-light strategy. Such a strategy involves the creation of joint ventures of capital-intensive businesses such as basic plastics and chlor-alkali.

However, Dow has already sold a number of non-core businesses in 2009 for around $3.4bn, according to an investor conference held in November. Since Dow paid down debt and maintained its investment-grade credit rating, the company is under less pressure to sell.

($1 = €0.73)

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By: Joseph Chang
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