Chemical M&A faces raw material headwinds – banker

16 February 2011 17:35  [Source: ICIS news]

NEW YORK (ICIS)--The chemical mergers and acquisitions (M&A) market faces headwinds from higher raw material costs in 2011, an investment banker said on Wednesday.

“2010 was a pretty good year for most chemical companies, as raw material costs were modest and they were able to secure price increases. But now raw material availability is tighter and prices are higher,” said Telly Zachariades, partner at US-based investment bank The Valence Group.

“From an M&A perspective, this may cause a disconnect between buyers and sellers, as profitability demonstrated in 2010 may not necessarily be sustainable,” he added.

Companies aiming to sell businesses based on high 2010 earnings before interest, tax, depreciation and amortisation (EBITDA) levels may face resistance from buyers skeptical of a repeat performance, hindered by margin pressures, noted the banker.

However, this depends on where companies are in the supply chain.

While many chemical intermediates producers are exercising tremendous pricing power, “buyers of intermediates, such as paints and coatings companies, are getting hit with these higher costs and being squeezed,” said Zachariades.

“If you’re a relatively undifferentiated paint company supplying to Home Depot, the consumer end isn’t going to support a price increase in today’s environment,” he added.

There are a number of chemical properties on the market, but also a fair amount of busted auctions, noted the banker.

“There will likely be an above-average failure rate of traditional broad-based auction processes in 2011,” Zachariades noted.

Factors include the reluctance of buyers to pay high multiples of 2010 EBITDA, as well as private equity sellers – buoyed by a surprisingly sharp resurgence in financing markets – having the option to refinance and pay themselves a dividend.

“If a private equity owner can put more leverage on a business they own, and strategic buyers are wary about the sustainability of EBITDA and are not prepared to pay ‘x’ times last year’s number, the owner may decide to keep it,” said Zachariades.

However, Zachariades still expects M&A activity in the chemical industry to be at or above the level witnessed in 2010.

“There’s still too much pent-up demand for this to slow down anytime soon,” he said.

Paul Hodges studies key influencers shaping the chemical industry in Chemicals and the Economy
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By: Joseph Chang
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