27 December 2010 15:00 [Source: ICIS news]
By Joseph Chang
Corporations are flush with cash, private equity firms are active on both the buy and sell side, and financing is readily available. This will lead to more deal activity in 2011.
“The current M&A market is strong and the outlook is very positive for 2011,” said Peter Young, president of US-based investment bank Young & Partners.
“Only a drop into another economic recession or a major hit to the financial system will prevent this improvement in chemical M&A in 2011,” he added.
Through the first three quarters of 2010, the global chemical market closed $32bn (€24bn) in deals on an equity basis, exceeding the $25bn for the whole of 2009, according to Young & Partners.
And the number of completed deals over $25m in size through the third quarter rose to 32, exceeding the 25 booked for all of 2010.
The threat of a double-dip recession has subsided, company earnings have been solid and debt markets have been strong, all leading to a spate of deal making.
Recent notable deals yet to close include: Thailand-based polyethylene terephthalate (PET) producer Indorama agreeing to buy US-based INVISTA’s PET assets in the US and Mexico for $229m; Mexican industrial conglomerate ALFA (through subsidiary DAK Americas) buying US-based Eastman Chemical’s PET business for $600m; US-based private equity firm TPG Capital acquiring US-based Ashland Distribution for $930m; and US specialty chemicals firm OMNOVA Solutions buying France-based specialty polymers and chemicals company Eliokem for €227.5m from France’s AXA Private Equity.
Chemical companies will continue to divest non-core assets in a favourable selling environment.
“There is still plenty of room for companies to consider divestitures. That kind of activity will remain steady,” said Christopher Cerimele, director and head of chemicals at US-based investment bank Houlihan Lokey.
“Many corporations would have liked to trim their portfolios in 2008–2009, but weren’t able to, and are now trying to take advantage of the improved market.”
And private equity buyers have made a comeback as financing has become more available and at cheaper rates.
Through the first three quarters of 2010, private equity firms completed 12 transactions of more than $25m, representing 26% of the total number of deals, according to Young & Partners.
This was a huge improvement on 2009, when the financial crisis shattered the debt markets. Last year, private equity buyers were crippled, completing only four deals, comprising 14% of the total.
“The greater availability of financing was particularly beneficial to the financial buyers, who have come back strongly, starting in the second quarter of this year,” said Young.
Much of the private equity deal activity has taken place in the
Private equity will be a big force on the sell side as well. More of these companies will seek to exit their chemical investments in 2011 on improved M&A market conditions and the initial public offering (IPO) market.
“There is a pent-up supply of assets in financial sponsor hands - long-in-the-tooth investments – that need to come out, so there will be pressure to sell or exit,” said Leland Harrs, managing director at US-based investment bank PrinceRidge Group.
“And on the buy side, the money’s out there. Strategic buyers and sponsors have lots of cash, lenders and lending and the high-yield market is on fire, so that will drive activity.”
The banker expects more private-equity sales of chemical assets to private-equity buyers, as strategic buyers are being very selective, mainly looking for bolt-on acquisitions that fit their existing businesses.
On November 30, US-based Royal Adhesives & Sealants was sold by US private equity firm Quad-C to the global Arsenal Capital Partners, another private equity firm.
“This transaction highlights the fact that sponsor-to-sponsor transactions can still get done in the current M&A market,” says Houlihan Lokey’s Cerimele, who advised Royal Adhesives & Sealants on the deal.
Telly Zachariades, partner at US-based investment bank The Valence Group, expects stronger chemical deal activity as strategic players seek growth and private equity firms both look to spend money raised in recent funds and sell off assets that have been held for several years.
“Private equity firms are hungry for deals in their more recent funds, and also looking to exit assets in vintage funds since they were not able to do so during the financial crisis of 2008–2009,” he said.
In many cases, deals beget more deals. US specialty chemical company Ashland agreed to sell its chemical distribution arm, Ashland Distribution, to TPG Capital for $930m in cash in a deal that is expected close in the first quarter. The proceeds will likely be used to make bolt-on acquisitions.
M&A valuations are also on the rise, as financing becomes more available, but are not to the point where they would choke off deal activity.
“We’ve seen a significant increase in valuations from the 2009 trough. This is good for sellers and a mixed bag for buyers. Sellers are now willing to sell assets, whereas in 2009 many would not.” said Young.
“But pricing is not skewed heavily to buyers or sellers - it is a market conducive to deal-making,” he added.
($1 = €0.76)
For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.
Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.
|ICIS news FREE TRIAL|
|Get access to breaking chemical news as it happens.|
|ICIS Global Petrochemical Index (IPEX)|
|ICIS Global Petrochemical Index (IPEX). Download the free tabular data and a chart of the historical index|
Asian Chemical Connections