INSIGHT: Chemical deals waiting in the wings

23 July 2012 16:46  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--PPG may have been waiting for the right time to get the right price for its chlor-alkali business but it has struck a sweet deal with Georgia Gulf; one that has been widely praised in the financial community.

The companies have been talking for months, sources say, and probably before US-headquartered olefins and vinyls producer Westlake made its abortive bid for Georgia Gulf.

PPG’s tax-efficient deal is not a straightforward acquisition but a spin-off by PPG followed by a merger of that split off company with US-based Georgia Gulf. US-based PPG will retain about $900m (€747m) from the transaction which it says it intends to use for coatings and related acquisitions.

The companies have demonstrated that important strategic deals can be struck in the current environment. The weak economic outlook and short-term nervousness are not great obstacles to forging the right agreement.

That message goes very much against the prevailing view that chemicals merger and acquisition (M&A) activity has slowed markedly. True, the value of deals so far in 2012 is well down on those completed in the first half of 2011. The second-half 2011 slowdown in completed deals by value was significant.

But many chemical companies are cash rich and, having negotiated a successful path through the 2008-09 crash are keen to get on with strategic business realignment.

In PPG’s case, it has wanted for years to divest chlor-alkali to focus more on coatings and specialty chemicals. Georgia Gulf has not so much seized, rather successfully negotiated the opportunity to grow to become the third-largest chlor-alkali producer and second-largest vinyl chloride monomer (VCM) producer in North America. Co-generation facilities at its sites give will give the enlarged company the opportunity to tap into cheap natural gas economics in North America.

Across the chemical sector, corporate strategies continue to play out and M&A activity remains robust. The deals in the pipeline now have had a lead time of many months, if not years.

“We’ve not seen any major change in sentiment or desire to contemplate action on M&A,” Valence Group partner Peter Hall said recently when speaking about the companies and transactions the investment bank monitors. There has been a significant drop in the value of deals done across the sector but not in deal volumes, he said.

The Valence Group believes that there could be as much as $10bn of deals in the pipeline in chemicals. The back end of the year is likely to be pretty active,” Hall said.

The company’s data suggest that the volume of deals in 2012 is likely to be comparable with 2010-11. “Despite market volatility, especially in Europe, the total number of deals from Jan0June 2012 is comparable to the same period in 2010 and only slightly lower than last year’s strong H1 [first half],” it says.

Total chemical deals value has dropped by about 50% compared with 2012 but this, before the PPG, Georgia Gulf announcement, was due largely to fewer deals worth more than $1bn.

Commenting before PPG and Georgia Gulf announced their agreement, Valence noted potential transactions involving Sachtleben, North America’s Houghton Chemical, DuPont Performance Coatings, Cytec Coating Resins, Germany’s Ruetgers, Flint Industries of the US and Norway’s Borregaard.

To mention just a few of these, Sachtleben, the titanium dioxide specialty pigments joint venture between Finland’s Kemira and Rockwood Holdings of the US, has agreed to buy TiO2 production assets and inventory from the insolvency administrator of Germany’s Crenox.

US-headquartered Cytec said in May that JPMorgan Chase & Co would help it sell its coating resins business. It expected the transaction to be complete by the end of this year.

Private equity firm Triton began the sale process for Germany-based Ruetgers in April.

The average size of deals in 2012 could rival the previous two years, the Valence Group believes.

With cash at hand and strategic imperatives firmly in mind, chemical company CEOs have teams in place ready not simply to run an eye over potential transactions but to execute them.

“We are not really seeing a fundamental shift in people looking at new projects,” Hall said. The outlook for the chemical industry globally is encouraging, he believes, so corporate players, as well as private equity, are keen to take advantage of at least small to medium-sized transactions to make advances in strategic markets.

Read Paul Hodges’ Chemicals and the Economy blog
Bookmark John Richardson and Malini Hariharan’s Asian Chemical Connections blog

($1 = €0.83)


By: Nigel Davis
+44 20 8652 3214



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