11 August 2010 15:04 [Source: ICB]
Mergers and acquisitions are picking up as strong strategic buyers seek growth and private equity exits. Who's up next on the selling block?
The chemical mergers and acquisitions (M&A) engine is firing up and starting to gain a head of steam, shrugging off fears of a global double-dip recession and an economic slowdown in China. 2010 looks to be a solid comeback year for M&A, and prospects for 2011 are looking more rosy.
Gareth JJ Burgess
Global chemical M&A activity increased significantly in the first half of 2010, with $29bn (€22bn) in deals over $25m in size completed, exceeding the total of $25bn for all of 2009, according to Young & Partners.
The number of these deals per quarter has also trended up since the trough of four deals in the first quarter (Q1) of 2009, leading to 17 transactions completed in Q2 of 2010, notes Young. Through the first half, 32 deals were completed, versus just 11 in the same period a year ago. M&A activity peaked in 2007 at 54 deals.
"Chemical M&A activity appears to be relatively active - greater than 2009 but not yet back to pre-2007 levels," says Chris Cerimele, director and head of chemicals at US-based investment bank Houlihan Lokey.
"We expect the M&A market to improve substantially in 2010 over 2009. The evidence can be found everywhere - in dollar volume, number of deals and deal backlog"
Telly Zachariades, partner of US-based investment bank The Valence Group, says: "We haven't seen a slowdown at all in M&A activity. Chemical companies are hitting it out of the park in terms of financial results. They have the cash and desire to do deals, and more assets to choose from."
The backlog of deals also bodes well for strong M&A activity going forward. As of June 30, the backlog of deals announced, but yet to close, stood at nine transactions worth $13bn - up from five deals worth $6.30bn at the end of 2009, and "a clear sign of a significant increase in activity," says Young.
"Chemical M&A activity appears to be relatively active - greater than 2009 but not yet back to pre-2007 levels"
On July 19, South Korea's Honam Petrochemical picked up a 72.2% stake in Malaysian polyethylene (PE) major Titan Chemicals for Malaysian ringgit $2.94bn ($910m). Honam plans to take full ownership of Titan by November, for a total investment of $1.30bn.
On the specialties front, German major BASF announced its €3.10bn ($4.00bn) acquisition of compatriot specialty chemical firm Cognis from global private equity firms Permira and Goldman Sachs Capital Partners on June 23.
Jonathan Tyler, global managing director of London-based M&A advisory firm DC Advisory Partners (part of Japan's Daiwa Securities Group), notes that the BASF/Cognis deal signifies the lack of readily available, privately held and sizeable chemical companies for sale, since the majority of Cognis's business consists of more commoditized personal care and household ingredient products.
"Chemical companies are hitting it out of the park in terms of financial results. They have the cash and desire to do deals, and more assets to choose from"
FLUSH WITH CASH
Many companies are better positioned than ever to make acquisitions, with high cash balances and profitable operations.
"The economic crisis of 2008-2009 prompted a major rethink from a cost perspective, as well as strategic positioning and product development. Companies have emerged in much better shape than before - not just with their cost structures, but they are also much more disciplined on the top line in terms of what they do, for whom and at what price," says Tim Wilding, managing director and head of chemicals at US-based investment bank Oppenheimer. "The necessity for survival has led to a huge improvement in operations."
"There are higher-quality listed specialty chemical companies, especially in the US, but these are more complicated to acquire and can often kick-start public bidding wars"
"The psychology of the market has improved significantly. Cost-cutting has taken place during the downturn and now companies are achieving a higher level of profitability," says Leland Harrs, managing director at US-based investment bank PrinceRidge Group. "Banks are lending again and there has been a noticeable pickup in interest, dialogue and activity. In this environment, deals can get done."
"The corporate buyers we see in the market tend to be most interested in bolt-on acquisitions in the roughly $100m range where there is a close strategic fit," says Cerimele.
US-based Solutia, which restructured and emerged from bankruptcy in February 2008, has made two major acquisitions this year and is on the prowl for more. It acquired Etimex Solar, a producer of ethyl vinyl acetate (EVA) solar encapsulants, on June 1 for €240m ($314m), and Singapore-based window films maker Novomatrix for $73m on May 3.
Look for Belgium's Solvay to be a major buyer of chemical assets. Having sold its pharmaceutical business in February for €5.20bn, it's sitting on over €5bn in cash, outweighing its €2.60bn in long-term debt.
"The psychology of the market has improved significantly. Cost-cutting has taken place during the downturn and now companies are achieving a higher level of profitability"
Managing director, PrinceRidge Group
Well-capitalized and growing companies from emerging economies will also look to buy Western assets, says Philip Kassin, senior managing director at US-based investment bank Evercore Partners, and former director on the supervisory board of Netherlands-based chemical major LyondellBasell.
"Foreign buyers are seeking their green card. Reliance Industries looked at NOVA Chemicals before it was bought out by IPIC [Abu Dhabi's International Petroleum Investment Co.] and tried to buy LyondellBasell. Brazil's Braskem also bought Sunoco's polypropylene [PP] assets," says Kassin.
He adds: "We think this will continue. Chinese companies also have expansionary desires and will look to globalize their business by acquiring technologies and assets abroad."
PET ASSETS ON THE BLOCK
One high-profile asset being evaluated for sale is US-based Eastman Chemical's polyethylene terephthalate (PET) business. The June announcement may have spurred a ripple effect.
US PET producer Invista is also considering the sale of its polymer and resin assets in North America, confirmed spokesperson Jodie Stutzman on July 21. This includes PET, dimethyl terephatlate (DMT) and specialty polymers.
"Hopefully this creates a real opportunity to consolidate the PET industry and start to deal with the current supply/demand imbalance," says Wilding. The PET market has been characterized by overcapacity and a high degree of cylicality.
Major PET players with assets in the US include Indonesia's Indorama, Mexico's Alfa Group, which owns PET producer DAK Americas, and Italy's M&G Group.
US-based Hexion Specialty Chemicals' ink resins business is also on the selling block, according to sources. Hexion, which is owned by US private equity firm Apollo Management, declined to comment.
"The book is out and the sale process is in the second round of bidding," says one source, referring to the documents on a company for sale available to potential buyers. "It's mostly financial buyers bidding."
The ink resins business, which includes the assets Apollo Management bought from US-based Eastman Chemical in 2004 for $215m, has around $300m in sales, notes one source. The business produces acrylic, polyamide, polyester and phenolic resins for printing inks.
Heading into 2011, private equity firms are likely to accelerate their sales of chemical assets, believes Wilding.
"2011 will be a busy time for exits by private equity, as market conditions improve and the timing aligns to meet their internal objectives," he says.
PRIVATE EQUITY SALES TO ACCELERATE
In the M&A heyday through much of the 2000s, fueled by cheap and available financing, private equity firms acquired a large amount of chemical assets. And with most private equity firms having a three- to five-year time period for holding an asset, the timing may be ripe to sell.
From 2000-2007, financial buyers were very active and made an average of more than 17 deals a year over $25m in size, according to data from Young & Partners.
But from 2008, not only did private equity start to disappear from the buy side, they also largely stopped selling assets.
"Both strategic and financial sponsor assets were either pulled off the market or simply not brought to market because of depressed economic conditions and lack of availability of credit in 2008-2009," notes Kassin.
"Now you'll see both strategics and sponsors looking to sell to rebalance and optimize their portfolios."
Private equity holders of major chemical assets include Apollo Management (formed Hexion in 2005 and Momentive Performance Materials in 2006), Carlyle Group (acquired PQ Corp. in 2007) and Court Square Capital Partners (acquired MacDermid in 2007).
"Some of these private equity-owned portfolio companies have really gotten their act together and significantly improved profitability, setting the stage for an IPO," says Zachariades.
US-based chemical distributor Univar, owned by the global CVC Capital Partners, filed for an initial public offering (IPO) in the US on June 30 to raise up to $862.5m.
The filing follows the IPO of German distributor Brenntag, owned by pan-European private equity firm BC Partners in late March, where it raised €747.5m.
Additional reporting by Ryan Hickman
ARIZONA CHEMICAL ON DUAL TRACK
US-based biorefiner of pine chemicals Arizona Chemical has been put up for sale, while private equity owner Rhone Capital pursues an initial public offering (IPO) in parallel. US-based Rhone Capital declined to comment, and Arizona Chemical did not respond to a request for comment.
One source estimated that Arizona could fetch around $1bn (€780m) in a sale based on a seven times multiple of estimated annual earnings before interest, tax, depreciation and amortization (EBITDA) of around $140m for 2010.
In 2009, the company generated $93.9m in adjusted EBITDA on sales of $767.5m.
Rhone Capital bought Arizona Chemical from compatriot International Paper in February 2007 for $485m. On April 12, Arizona Chemical filed an S-1 registration statement with the US Securities and Exchange Commission for an IPO.
"Most sponsors would rather sell outright than exit in an IPO, as the latter has an added element of uncertainty in terms of success and ultimate timing. It can take two years or more to fully exit after an IPO. However, sometimes, new capital raised in an IPO can be used to invest in the business and create additional value for the ultimate exit," says Tim Wilding, managing director and head of chemicals at US-based investment bank Oppenheimer.
"The broader US IPO market has had fits and starts in 2010, and investors are currently catching their breath. However, if Q3 earnings for the sector continue, the recent positive historic trend, investors could renew their appetite for chemical equities," he adds.
M&A valuations are also moving out of 2009 trough levels in both commodity and specialty chemicals, notes Peter Young, president of US-based investment bank Young & Partners. "We are well off peak levels, but emerging from the very low 2009 values," he says.
Allan Benton, vice chairman and head of the chemical practice at US-based investment bank Scott-Macon, notes that completed global specialty chemical deals in the first half of 2010 had a median enterprise value (EV)/EBITDA multiple of 10.1 times versus 7.3 times in 2009, 9.6 times in 2008 and 9.8 times in 2007.
"The activity level is stronger. We see strategic buyers wanting to make good acquisitions in their core businesses," says Benton. The low level of public chemical company valuations could spur acquisitions of these companies or leveraged buyouts (LBOs), says Wilding.
"The activity level is stronger. We see strategic buyers wanting to make good acquisitions in their core businesses"
US pure-play chemical stocks covered by US bank J.P. Morgan are trading at a median EV/EBITDA multiple of 6.6 times estimated 2010 EBITDA, according to data compiled from J.P.Morgan estimates.
TWO FACTORS ARE KEY
Smaller chemical deals are also in the works. Two factors in particular are adding fuel to the M&A fire for the sale of small firms - the EU's Reach legislation and the expected jump in US capital gains tax.
"We are hearing about smaller chemical businesses trying to close deals because of the costs of complying with Reach - this is accelerating the decision to sell," says Houlihan Lokey's Chris Cerimele, director and head of chemicals at US investment bank Houlihan Lokey. "Also, in the US there is a pending increase in capital gains tax rates coming at the end of the year, which has been an additional consideration for many owners," he adds.
The US capital gains tax rate of 15% is set to rise to 20% in 2011 unless the Obama administration extends former president Bush's tax cuts.
FINANCIAL BUYERS COMING BACK
Private equity firms are starting to get more active on the buy side as well, after a two-year hiatus.
In 2008, when the financial and economic crisis hit, the number of chemical assets over $25m (€19m) in value acquired by financial buyers dropped dramatically to eight deals and plunged further in 2009 to four transactions, according to US investment bank Young & Partners. The trend continued into the first quarter of 2010, with only two deals.
"Financial buyers had the funds, but could not borrow and were focused on protecting their existing portfolio companies," says Young.
However, "the role of financial buyers increased significantly in the second quarter," notes Young, citing, among many examples, global private equity firm Bain Capital's acquisition of US-based Dow Chemical's Styron polymers business for $1.63bn on June 18, as well as the change in control of Netherlands-headquartered polymers producer LyondellBasell in the bankruptcy process by a consortium led by private equity firm Apollo Management and industrial group Access Industries, both US.
As a result, in the first half of 2010, financial buyers accounted for eight deals, or 25% of the total, as well as 48% of the dollar volume, according to Young & Partners.
Capital to finance deals is available, although not as much as in the years before 2008, notes Leland Harrs, managing director of US investment bank PrinceRidge Group. "Mid-cap deals of around $200m in enterprise value can still get financing of three to four times EBITDA, whereas in 2007 it was about five to six times," he says. "You don't see wild-eyed optimism, but rather a sense that you can get something done."
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