INSIGHT: First-half confidence in M&A likely to wane

11 August 2010 17:24  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Chemicals mergers and acquisitions (M&A) activity has picked up in the first half of 2010 but could be under a cloud in the last six months of the year.

Economic uncertainty abounds and in Europe the euro’s weakness hangs over the market. The US market for chemicals assets appears more buoyant but appears to be headed for a slowdown.

Bankers believe that the European market for deals will be lifted a little in the second half from a couple of outstanding acquisitions: that of the Compo market garden nitrogen business by Kali & Salz and of PolymerLatex by TowerBrook Capital partners. But the approach to deal-making has changed.

Highly-leveraged mega-deals, particularly - the characteristic of the sector at the peak of the cycle in 2008 - are unlikely in the current financial and industry environment. Sellers also are approaching deal-making with some caution and keen to achieve reasonable value in transactions.

Gone too is the notion that some companies will be forced to sell assets to help reduce financial exposure. The pick-up in industry activity, higher demand and (product) prices have seen to that.

Portfolio focus and possibly consolidation continue to be important aspects of corporate strategy. And plans for the divestment of businesses that were prepared for sale before the global financial crisis and slump are being dusted off.

Private equity players also are showing signs of life in a more upbeat deal-making environment.

Bain Capital has been active in purchasing Dow’s Styron styrenics business, for example.

BASF has let it be known that it is looking for a buyer once again for a large part of its styrenics business but that it is seeking fair value.

The chemicals giant concluded the biggest deal of the first half when it purchased personal care chemicals maker Cognis from Permira and Goldman Sachs Capital Partners.

Private equity players have been keen to seek exits from investments made not that long ago - they tend to work to a three to five year timeline.

In the chemicals sector in the US currently, Apollo Management holds Hexion, which it bought in 2005, and Momentive Performance Materials, a 2006 acquisition. The Carlyle Group acquired PQ Corporation in 2007 and Court Square Capital Partners bought MacDermid in 2007.

A banker in the US suggested to ICIS last month that 2011 will be a busy time for exits by private equity as US market conditions improve and the timing aligns to meet company objectives.

The investors may not always seek the trade divestment route, however, but instead could take advantage of a healthier appetite for new company shares and initial public offerings (IPOs).

Corporate buyers and sellers, however, have become much more active and companies of many sorts say they are on the look out for deals.

LANXESS has been suggested as a possible acquirer of BASF’s leather chemicals business.

Solvay has a €3.0bn ($4.0bn) war chest following the divestment of its pharmaceuticals business to Abbot. The flavourings firm Symrise has been suggested as a likely target.

On the sell side INEOS was active in the first half, divesting its fluorochemicals business to fluorspar producer MexiChem. It has just concluded the deal to sell specialty polymer film operations to pharma and healthcare group Bilcare.

Eastman Chemical said in a second-quarter conference call that it was confident of finding a buyer for its polyethylene terephthalate (PET) business by the end of the year.

The MergerMarket data service suggested this week that the M&A outlook for Europe was mixed, nevertheless.

“A chemicals banker also argued that, while the Compo sale and that of latex-maker PolymerLatex will certainly keep the market alive in the summer months, a euro weakened by the continent’s sovereign debt crisis could yet make Solvay and more traditional buyers such as Arkema and LANXESS more cautious about deals,” it said.

There was a significant improvement in global M&A activity in the first half.

“There are clear signs of a pick-up in chemical M&A volume with a thawing of credit, a stabilisation of economies around the world, increasing buyer confidence, more realistic price expectations by sellers, higher confidence in earnings and cash flow forecasts, and high cash balances,” Peter Young, president of chemicals and life sciences at investment bank Young & Partners, said at the end of July.

But there is increasing evidence that first-half confidence is giving way to second-half circumspection.

($1 = €0.76)

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By: Nigel Davis
+44 20 8652 3214

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