29 December 2011 13:45 [Source: ICIS news]
By Joseph Chang and Leigh Stringer
NEW YORK (ICIS)--After a record year for global chemical mergers and acquisitions (M&A) in 2011, the deal market is likely to fall in 2012, in terms of dollar volumes, as players struggle with an uncertain economic outlook and financing challenges.
Momentum already slowed in the second half of the year, and prospects for 2012 hinge on greater confidence in a resolution to the eurozone debt crisis. But underlying buying interest is high, while availability of assets for sale remains limited.
“The chemical M&A market is clearly past the peak – both in terms of dollar volumes and valuations – as greater uncertainty about the economic outlook and a more difficult high-yield financing market has restrained transactions,” said Peter Young, president and managing director of US-based investment bank Young & Partners.
“There are clear signs that M&A volume is slowing, as the number of deals has slipped each quarter – from 27 in the first quarter to 18 in the second, and 16 in the third.”
Through the first three quarters of 2011, a record $64bn (€49bn) in chemical deals were completed on an equity basis versus $39bn for all of 2010, according to Young & Partners. There were 61 completed deals over $25m in the first three quarters of 2011, compared with 65 in the whole of 2011.
“Although total M&A deal volume was strong through the first three quarters of 2011, deal activity has been slowing down due to concerns about the eurozone debt crisis and the possibility of another recession. In fact, the number of completed deals has gone down each quarter since the first quarter,” Young said.
“Looking forward, the value of deals announced but not closed as of September 30 2011 was $11.3bn [16 deals], compared with $34bn [23 deals] at the end of June.”
He said that announcements have continued to dwindle, with only five deals worth a total of $506m announced between 30 September and 15 November.
“Executives are concerned about the unknown trajectory of the European crisis. This is causing some – but not all – buyers to hesitate about pursuing deals until there is more clarity about the future,” Young added.
Financial buyers have had the most difficulty buying businesses in 2011, according to Young. Private equity firms’ share of the chemical M&A market fell from 21% in 2010 to 5% in the first three quarters of 2011, he said.
“In the beginning of the year, they were outbid by strategic buyers. But the weak high-yield debt market took over as the handicap in late July,” Young said.
Deals between companies in Asia and Europe helped strengthen M&A activity in 2011, with ?xml:namespace>
China National Bluestar bought Norway-based silica products company Elkem for $2bn, and Petrochina paid $1bn for a 50% stake in Switzerland-based INEOS Refining, which was part of a broader technology-sharing deal.
Consulting and auditing firm PricewaterhouseCoopers (PwC) said in its third-quarter Chemical compounds report that, although the Asian market made a prominent mark in 2011, the level of activity associated with
“[Chinese economic] growth [is] expected to fall below double digits for the near term,” it added.
The report said a combination of weaker international demand for goods made in
Despite these difficulties, PwC expects recovery to continue: “While concerns of a double-dip recession remain, strategic investors are committed to growth through inorganic means, and many are well positioned to take advantage of M&A opportunities.”
“Unless there is a major financial and economic crisis – which is possible – Young & Partners expects M&A volume for the rest of 2011 and early 2012 to gradually soften off a very high base, but still be solid and healthy in the aggregate,” Young said.
“Chemical companies are [now] much better prepared to weather a financial liquidity crisis and a hit to revenues,” he added.
PwC director Mike Clements said the underlying story of 2011 was valuations: “The chemical industry has rebounded from its low in the first quarter of 2009, with profitability back to the peak levels seen in mid-2008, driving valuations up.”
However, during the third quarter, high valuations also led to a reduction in deal volume, and this was accelerated in the fourth quarter by low eurozone bank debt and bond availability, he added.
Many bankers say the demand to buy chemical assets is still strong, despite an overall slowdown in M&A activity. The problem has been the lack of assets on the selling block.
“The motivation to do deals remains strong, with corporate cash levels high and leverage levels low. We are seeing fewer auctions, but more one-on-one negotiated discussions,” said Chris Cerimele, director and head of chemicals at US-based investment bank Houlihan Lokey.
“There is a great appetite to buy in this market, but a lack of opportunities. Companies with strong balance sheets also have no impetus to sell,” said Chris Carlisle, head of chemicals for Europe, Middle East and
The imbalance of high buy-side interest, coupled with a dearth of assets available for sale, has led to relatively high M&A valuations in certain situations.
“Assets have been bid up on the scarcity factor, even [though] there has not been a huge amount of activity. This is a good dynamic for a seller,” said Tim Wilding, managing director and head of chemicals at US-based investment bank Oppenheimer.
Through the first half of 2011, as companies had greater confidence in business prospects, there was a great deal of takeover activity involving publicly traded chemical targets.
More such large deals could emerge in 2012, noted Nomura’s
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“We are increasingly getting comfortable that the North American chemical industry will see a revival in the coming years versus the steady decline that has taken place in the past 10 years with the movement of manufacturing overseas,” said John Televantos, partner at US-based private equity firm Arsenal Capital Partners.
“Europe and Asia cannot match the low-cost energy and feedstock position of the
He foresees healthy valuations likely to lead to sellers coming out of the shadows in early 2012: “Strong balance sheets for strategic buyers and abundant capital among private equity firms mean that a lot of people that have been waiting to sell businesses will finally crack and put them on the market.”
Leland Harrs, managing director and co-head of corporate finance at US-based investment bank PrinceRidge, was cautiously optimistic: “Corporates are well capitalised and acquisitive, and financial sponsors are also active and interested. We expect good deal flow in 2012, but no major changes on the upside or downside.”
Private equity firms could be more active on the sell side in 2012, as many acquired assets are approaching or exceeding their typical three to five year holding period.
“Sponsors that have assets in their portfolios that are past the 'sell-by' date may want to sell to ‘put runs on the board’, returning capital to their investors,” said John McNicholas, head of investment banking at PrinceRidge.
Oppenheimer’s Wilding expects some chemical assets owned by private equity firms to go public through initial public offerings (IPOs): “The public market is an alternative route for sellers, especially if they believe the M&A process is not giving credit to the asset’s future earnings potential. And there could be other reasons for raising equity capital, such as strategic growth capital or deleveraging.”
On the flip side, “a challenging IPO market could drive sellers to an M&A solution”, said Telly Zachariades, partner at global investment bank the Valence Group.
One factor hindering M&A activity in the short term is the change in buyer and seller expectations since the second half of 2011, when global growth slowdown became more evident, along with greater uncertainty coming from the eurozone debt crisis.
“Going into 2012, sellers want to sell at high multiples off of relatively strong 2011 earnings, where buyers are not sure about the external environment in 2012. Buyers are discounting 2012 earnings expectations, leading to wider bid-ask gaps,” said Damon Warmack, vice president of corporate development and strategy at US-based chemical company Eastman.
The recent memory of high public market valuations, which peaked in May 2011, and the subsequent collapse in the second half of 2011 could be a psychological barrier to selling at this time. Companies might well be reluctant to sell assets so soon after such a steep fall.
“The mid-2011 decline in public trading multiples certainly had a negative impact on M&A activity, as buyer and seller expectations did not match,” said PrinceRidge’s McNicholas.
The Valence Group’s Zachariades sees a disconnection between the solid fundamentals of the chemical business and the fear permeating the market from the European sovereign debt crisis and other similar perceived macroeconomic negatives.
“The fundamentals don’t jive with all the fear mongering. There is some temporary inventory destocking taking place, but many executives are not seeing weakness in their business beyond the seasonal downturn,” Zachariades said.
“2012 is going to be a pretty good year for chemical M&A, based on the fundamentals, which are still strong,” he said.
“Corporates and private equity firms are still flush with cash, and M&A is still a high priority for them to generate growth,” he added.
($1 = €0.77)
Additional reporting by Will Beacham
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