INSIGHT: M&A activity cools in uncertain times

22 October 2012 17:12  [Source: ICIS news]

By Nigel Davis

Chemicals M&A deals are being doneLONDON (ICIS)--Chemicals merger and acquisition (M&A) activity is likely to slow further given the current demand uncertainty but it still looks as though 2012 could be on a par with 2010, at least in terms of deal value.

“The number of chemical M&A transactions in Q3 2012 [the third quarter of 2012] has held up despite apparent weakening macroeconomic indicators in Europe and Asia,” M&A advisory firm the Valence Group said last week

“Any indication of a decline in deal volume was muted, with Q3 data at similar levels to the same period last year. Overall value of M&A activity this year is expected to be comparable with 2010 but down on the high levels seen in 2011.”

A number of relatively large deals have been completed in the past few months, and financial buyers have been active. The sale of DuPont Performance Coatings to the Carlyle Group for $4.9bn (€3.8bn) was agreed at the end of August. Advent International agreed in October to buy Cytec Coating Resins for $1.03bn.

The view earlier this year was that industrial players would be playing a more significant role in the 2012 M&A picture. They have cash resources built up through relatively good times since the 2008-2009 slump. It had appeared that they might be primed strategically to make M&A moves.

But predominantly, the Valence Group notes, chemical companies have been sellers of the larger businesses. There have been exceptions, however. US specialty chemicals and performance materials group Cabot agreed in June to buy Netherlands-registered activated carbon firm Norit for $1.1bn. US water chemicals and services Ecolab agreed in October to pay $2.2bn for privately-held, Houston-headquartered, oilfield chemicals firm Champion Technologies.

“Companies are evaluating acquisitions more carefully, although still keen to invest across the spectrum, especially in non-transformational transactions,” the Valence Group says. This means that firms continue to evaluate and complete bolt-on acquisitions, sometimes in specific product or end-use areas. BASF is a case in point in battery technologies. The chemicals giant has made a number of acquisitions in a relatively short period that should prove important to its new advanced battery technologies business.

A trend highlighted by Valence, however, has been increased activity from players headquartered in Asia and the Middle East.

“Over the last five years about 35% of all chemicals M&A originated in/from Asia and the Middle East, and indeed 15% of all chemical acquisitions were outbound M&A from these regions,” the advisory firm says.

“This is a huge increase from 10 years ago when activity in these regions was nascent.”

The Valence Group identifies three drivers for the greater involvement of Asia and Middle East players in chemicals M&A globally: China’s growth plans, the strengthening of the Japanese yen and still high oil prices. M&A involving Middle East and Asia players is likely to account for 50% of total chemicals M&A within five to 10 years, it suggests.

We are talking about the value of deals here and, when it comes to numbers, Europe and the US still account for more than 60% of all deals. The types of transaction are varied, having more to do with the realignment of portfolios or specific businesses.

On the other hand, moves by the likes of Saudi Arabia’s SABIC and the Abu Dhabi investment fund IPIC tend to be greater in value, driven by the need to create scale and presence in established markets.

The Valence Group says that activity out of Asia tends to be a mixture of these, although the company talks of “considerable outbound activity”.

Shale gas exploitation in the US will be a strong pull for investment from all regions, it adds.

“The increased competitiveness of the US chemical industry from low-cost energy, advantaged feedstocks and improved manufacturing productivity, has become perhaps the most important structural change in the last 10 years. This is already fuelling M&A both in the US and from abroad (eg TPC proposed acquisition by Innospec, Indorama’s acquisition of Old World Industries and the PPG chlor-alkali/Georgia Gulf merger). As more shale gas reserves are brought on stream, both investment and M&A activity should further increase in the US.”

Mergers and acquisitions are more likely to be struck, however, in better economic times and, particularly, when the economic outlook is clearer. Europe’s sovereign debt crisis, the upcoming presidential election in the US, and also the once-in-a-decade handover of power in China hardly create an environment conducive to deal making.

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

($1 = €0.77)

By: Nigel Davis
+44 20 8652 3214

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