OUTLOOK '11: Chemicals M&A activity to continue

29 December 2010 13:00  [Source: ICIS news]

By Hilde Ovrebekk

Chemicals M&A activity to continueLONDON (ICIS)--This year has been a good one for mergers and acquisitions (M&A) in the chemicals industry and activity is expected to remain strong in 2011 as companies have built up healthy balance sheets and are in the market to buy.

Investment banker Young & Partners said recently that through the first three quarters of 2010, the global chemical market closed $32bn (€24bn) in deals on an equity basis, exceeding the $25bn for all of 2009.

Activity in M&A was resurgent this year as trading conditions in the industry picked up after a sharp drop during the financial crisis, which started in September 2008.

Business confidence has returned, and combined with low interest rates and successful cost-cutting measures, a lot of companies have seen cash flow increase and are looking to grow their business.

Buckingham Research Group said there had been a surge in small and mid-sized deals due to uncertainty about capital gains and dividend taxes.

“Once tax policy settles down, M&A activity could re-accelerate since interest rates for buyers are still historically low for borrowing, and strategic buyers have historically high cash levels,” the research group said.

It added that private equity owners were still looking to exit mature investments, which they were unwilling to sell during the recession.

While German chemicals major BASF recently completed another major deal through the acquisition of specialty chemicals maker Cognis, CFO of strategic acquirer LANXESS, Matthias Zachert, said his company’s current focus was on small to medium-sized acquisitions.

Karl Nietvelt, director of corporate ratings at Standard & Poor's, said the pick-up in M&A activity had already started, with several transactions concluded in recent weeks.

These deals included a €310m acquisition of a potash mine in Canada, which would require multi-billion spending on development, as well as a €550m mid-sized acquisition for the coating resins and photocure chemical activities of Total, which should provide further downstream integration for Arkema's acrylic monomers.

Nietvelt added that recent transactions also included a €310m elastomers acquisition from DSM, which "makes a good strategic fit and will strengthen its market position in this segment".

M&A activity was expected to continue in 2011, mainly for two reasons.

“Most chemical companies [had] relatively strong [balance sheets] and strengthened liquidity through the crisis; they could use this flexibility for M&A,” said Nieltvelt.

He added that companies like Solvay, DSM and Clariant all have large surplus cash balances on their balance sheets. Evonik’s financial flexibility is also likely to increase following the disposal of energy provider Steag.

“[The mid-term] chemical outlook is positive, with many companies anticipating higher profitability (after cost reductions, pricing discipline and strong recovery after the crisis) and having ambitious mid-term growth plans,” said Nietvelt.

Conditions are also good for financing possible acquisitions.

The Buckingham Research Group said that due to the fact that higher quality deals can obtain debt- EBITDA (earnings before interest, tax, depreciation and amortisation) leverage up to 3.5 times, while lower quality deals can still only fetch around 2.5 times, interest has been shifting towards high quality specialties.

($1 = €0.76)

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By: Hilde Ovrebekk
+44 20 8652 3214



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