Chemical industry mergers and acquisitions activity to emerge from a slow thaw

The great thaw

11 March 2010 08:46  [Source: ICB]

The global chemical M&A market emerges from its slumber as strategic and financial buyers wade into the pool

IT'S BEEN a painful bottom - for the global economy and the chemical industry. Blockbuster mergers and acquisitions (M&A) were the hallmark of boom times and easy credit, but the flurry of activity screeched to a halt once the economic crisis got underway in earnest in late 2008 through the first half of 2009.

But M&A activity is picking up and poised for a significant recovery in 2010, with select strategic buyers more ­confident in their own prospects and private equity firms once again getting access to credit. Buyers in emerging markets are also becoming more aggressive, ­opportunistically seeking out assets in North America and Europe to expand their global footprint.

 Chris Eyles
"There are clear signs of a ­thawing of credit and a stabilization of the ­economies around the world, increasing buyer ­confidence, more realistic price ­expectations by sellers, and a higher confidence in earnings and cash flow forecasts," says Peter Young, president of New York, US-based investment bank Young & Partners. "These factors are driving a slow thawing of the M&A market for chemicals, and we expect the market to improve substantially in 2010. Only an economic or financial ­system relapse, currently considered a 'wild card,' will prevent the improvement from happening."

Allan Benton, vice chairman and head of the chemical practice at New ­York-based investment bank Scott-Macon, adds: "Financial buyers are able to get financing and are coming back into the market. Plus, strategic buyers are looking for quality businesses that can provide good synergies."

For all of 2009, the global chemical industry completed $25.4bn (€18.3bn) in deals over $25m in size on an equity basis, according to Young & Partners. This was down from $39.7bn in deals in 2008 and far from the peak of $54bn in 2007.

Four large deals, between the US's Dow Chemical and Rohm and Haas; Germany's BASF and Switzerland's Ciba; Japan's Mitsubishi Rayon and the UK's Lucite International; and Germany 's K+S Kali and US-based Morton Salt accounted for more than $20bn - the vast majority of the total in 2009.

The number of deals that totaled more than $25m in value fell to 26 in 2009 versus 55 in 2008. Activity peaked in 2004 with 91 deals, while 2007 saw a robust 87 deals, notes Young & Partners. Transaction volume bottomed in Q1 2009 at four deals, rising to seven in Q2, eight in Q3 and seven in Q4 - "a small sign that market volume is improving," says Young.

"There are clear signs of a ­thawing of credit" 
 Peter Young, president, Young & Partners
"Depressed earnings of acquirers and ­target businesses, disagreements between buyers and sellers on valuation, the lack of debt financing, the inability to accurately forecast the earnings and cash flows of ­target businesses, and more sellers than buyers all contributed to the suppressed number of completed transactions," he notes.

The backlog of announced deals yet to close at the end of 2009 amounted to five deals worth a potential $6.3bn, according to Young & Partners.

"M&A activity has picked up, and we see more bolt-on transactions in the small to mid-market area valued at $300m or less," says Saverio Fato, global chemicals leader for global consultancy PricewaterhouseCoopers (PwC).

Interest in North American chemical assets from foreign strategic buyers is on the rise, notes Chris Cerimele, director and head of chemicals at global investment bank Houlihan Lokey.

"We are seeing more buy-side inquiries from foreign strategic acquirers based in the Middle East, as well as China and Japan," he says. "The overall sentiment is that strategic buyers of all kinds are back and looking for deals."

And Latin American buyers are showing their interest in North American and Eurpean assets as well.

"Buyers are looking for quality businesses" 
 Allan Benton, vice chairman, Scott-Macon

On February 1, Brazilian petrochemical and plastics giant Braskem announced it would buy US-based Sunoco's polypropylene (PP) business for $350m, picking up the fourth-largest PP producer in the US, with 950,000 tonnes/year of capacity. Braskem, which also announced the takeover of Brazilian polymers firm Quattor in January, says it plans to make additional acquisitions in the US.

Analyst P.J. Juvekar, of US bank Citigroup, estimates that Braskem paid 4-4.5 times earnings before interest, tax, depreciation and amortization (EBITDA) for the Sunoco assets.

And on February 2, Mexico's Mexichem agreed to buy INEOS Fluor from UK-based chemical group INEOS for an undisclosed sum. INEOS Fluor, with sales of around €300m/year, has fluorochemical operations in North America, Europe and Asia.

In Europe, South Korea's Lotte Chemical, a subsidiary of KP Chemical, acquired all of Artenius UK's assets, including its purified terephthalic acid (PTA) and polyethylene terephthalate (PET) plants at Wilton, Teesside, which had been shut down last summer. Artenius UK was owned by Spanish textiles and fibers group La Seda de Barcelona.

Indian petrochemical and refining giant Reliance Industries is weighing its options to acquire the Netherlands-based petrochemical firm LyondellBasell Industries, after its nonbinding bid of $13.5bn was shot down in favor of a management reorganization plan.

"There has been significant growth in China and India, and a tremendous amount of capital generated. Companies in these and other emerging markets are looking for ways to deploy this capital, through further growth in their domestic markets but also abroad," notes Fato. "We have seen these companies in the last three years move their acquisition strategy offshore to include acquisitions of companies in both the US and Europe."

"We expect to see much more activity over the next five to 10 years from chemical companies in emerging countries," says Bruce Chalmers, director of transaction services at PwC. "They are now acquiring the strategic vision to become real global players."

Strategic buyers are likely to lead the recovery in the global chemical M&A market.

"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," says Bill 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."

The banker sees small to medium-sized specialty chemical deals at $200m or under happening in the five to six times EBITDA range, versus seven to eight times or even double-digit multiples in peak times. Some deals under $100m in size are being done at about four times EBITDA, he adds.

"We are continuing to see more ­corporates wanting to make acquisitions," says Telly Zachariades, cofounder and partner of investment bank The Valence Group. "US-based companies such as Eastman, Cytec and Albemarle, that have been through the worst of the downcycle and emerged relatively unscathed, have managed to accumulate significant cash on the balance sheet and are now ready to pull the trigger."

While in 2009, buyers were predominantly looking for distressed bargains, they are now seeking acquisitions for growth, says Cerimele.

And where growth opportunities are limited, some firms may force the issue on M&A.

On February 8, US industrial gases and chemical firm Air Products announced an unsolicited offer to acquire US-based Airgas for $60/share, or $7bn, including $1.89bn of assumed debt. Airgas has rejected the offer.

On the sell side, 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," says 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."

"You sometimes have to sacrifice a pawn to advance" 
 Telly Zachariades, cofounder and partner, The Valence Group
However, sellers are seeking opportunities for businesses that are truly non-core.

"You sometimes have to sacrifice a pawn to advance on the board," says 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 realize that buyers have cash and there is a lack of quality assets for sale."

Dow Chemical is targeting $2bn in divestitures in 2010. It aims to sell its Styron styrenics assets, along with 10-15 other businesses. Plus, it continues to embark on its "asset-light" strategy involving the potential joint venturing of capital-intensive businesses such as basic plastics and chlor-alkali.

However, having already sold a number of non-core businesses in 2009 for around $3.5bn, paying down
"The high-yield market has come back" 
 Leland Harrs, managing director, PrinceRidge Group
debt and maintaining its investment-grade credit rating, the company is under less pressure to sell.

Leland Harrs, managing director of investment bank PrinceRidge Group, notes the lack of assets on the selling block.

"Many companies would like to buy, financing has improved, but the supply (of assets) is just not there yet. But it's early days," he says.

"Private equity firms have a limited time horizon" 
 Omar Diaz, managing director, Allegiance Capital
"As a potential seller, you're not forced to sell right now - you can hold off a bit until business conditions improve further," says Justin Vorwerk, co-head of corporate finance at PrinceRidge.

However, more distressed assets could become available later as a number of companies have yet to find a long-term solution for stressed balance sheets, notes Cerimele.

"Banks have chosen to 'amend and extend' credit lines rather than force companies into bankruptcy. But that is just kicking the problem down the road," he says.

One factor that could spur middle-market deals is the specter of higher capital gains taxes in the US, causing owners of assets to sell ahead of the tax increase.

"The Obama administration is expected to raise capital gains taxes from 15%, to 25%, and this is very important to private business owners," says Omar Diaz, managing director of US-based investment bank Allegiance Capital. "We expect an increase in deal activity in 2010, with some driven by the fear and reality of higher capital gains taxes."

Private equity firms are also getting back in the M&A game, after a difficult 2009 when the financing market all but collapsed early in the year.

Private equity firms completed just four deals over $25m in size in 2009, representing 15% of the total number of transactions, according to Young & Partners. And the dollar value of these deals represented just 2% of the total dollar volume. This was down from eight deals in 2008, which also comprised 15% of the total number of deals. As early as 2007, private equity firms completed 18 deals, or 22% of the total.

"Financial buyers enjoyed about 20-25% of the market since 2000 based on the number of deals, but have lost share starting in 2006," says Young.

"Private equity firms had difficulty getting financing in the past few years, but now have a lot of dry power," says Breen. "They're out hunting for portfolio companies as well as bolt-ons for what they already own."

Global private equity groups are sitting on about $300bn of uninvested capital, according to Diaz.

During the thick of the financial and economic crisis, many private equity firms focused on buying distressed debt rather than buying the equity of companies, says Harrs. "But that trend has run its course as the high-yield market has come back. Now they are turning their attention to the ­traditional model," he says.

Private equity buyers have been more active in the second half of 2009 and in early 2010, points out Benton.

On January 28, Canadian private equity firm TorQuest Partners completed its acquisition of wood-rosin and natural-wood-terpenes business Pinova from US specialty chemicals firm Ashland for $75m.

Ashland sold its Drew Marine water treatment business to another private equity firm - US-based J.F. Lehman & Company - in August 2009 for about $120m.

Private equity firm American Securities completed its acquisition of US chemical, valve and auto parts firm GenTek for $562m ($411m in cash plus the assumption of debt), in October 2009. The deal was done at a relatively low multiple of 4.6 times EBITDA, notes Benton.

"Banks have chosen to 'amend and extend' credit lines" 
 Chris Cerimele, director, Houlihan Lokey
Private equity firms are likely to seek acquisitions in the middle market, with deals less than $500m in size, says Vorwerk. "Banks will be more receptive to financings under $500m, as they are still hesitant to write huge checks in private equity deals," he says.

Private equity may also become more active on the sell side in 2010, as they aim to disgorge assets picked up over the past boom years.

"We've seen a discernable pickup in activity, with financial sponsors planning to come to market with assets in their portfolio," says Harrs. "There is a recognition that financing markets are returning to health and banks are willing to lend again. Plus, public valuations have increased significantly over the past 12 months."

"Strategic buyers sat out the worst of the meltdown" 
 Bill Breen, managing director, National Capital Companies
"Private equity firms have a limited time horizon of around five years before they have to divest, and many are coming up," says Diaz.

On January 5, US private equity firm MCM Capital sold Amrep, a US producer of specialty cleaning chemicals, lubricants and herbicides, to US-based cleaning chemicals firm Zep for $64.4m in cash.

Transaction valuations for global specialty chemical acquisitions are likely to stabilize in 2010, after falling significantly in 2009, says Allan Benton, vice chairman and head of the chemical practice at US investment bank Scott-Macon.

For specialty chemical deals completed in 2009, the median transaction multiple was 7.3 times trailing 12-month earnings before interest, tax, depreciation and amortization (EBITDA) - a decline from a median multiple of 9.6 times in 2008, according to Benton.

"We're seeing an improvement in multiples offered for good quality assets, especially for strategic deals," he says.

US plastics compounder A. Schulman's December 2, 2009 offer to acquire ICO, a US-based producer of custom polymer powders and plastic film concentrates - valued at $199m (€145m), including debt - represents a multiple of about 15 times trailing 12-month EBITDA, he estimates.

And US industrial gases producer Air Products' unsolicited bid to acquire US packaged gases firm Airgas for about $6.5bn, including debt, represents a multiple of about 10 times EBITDA, he adds.

Acquirers of mid-market assets were able to secure financing at improved multiples of EBITDA in the second half of 2009 compared with the first half, while large deals could also obtain greater leverage, says Benton.

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