InterviewUS chemical M&A activity to revive post election

06 November 2012 17:01  [Source: ICIS news]

By Joseph Chang

NEW YORK (ICIS)--US chemical merger and acquisition (M&A) activity should get a boost following the US presidential and congressional elections, investment bankers said on Tuesday.

“We expect M&A activity to increase next year, particularly in the US, where any uncertainty associated with the election and associated changes in taxation are removed from the equation,” said Telly Zachariades, partner at global investment bank The Valence Group.

“Regardless of who wins the presidency on Tuesday, we are convinced that the global economy is already on the mend and that investment in new hiring, CAPX [capital spending] and M&A will grow significantly in 2013,” he added.

Peter Hall, also partner at The Valence Group, said that “acquirers who have been close to the finish line on a deal in the past couple of months may well have been back-peddling on inking a deal pending the outcome of the election”.

“Once the election is out the way, regardless of the outcome, there will likely be a number of deals that will finally be pushed forward,” he added.

The end of months of political wrangling over the elections will also go a long way in boosting confidence among senior management, said Zachariades.

“M&A activity also depends to a very large degree on CEO/board confidence. The political situation here in the US has resulted in a lot scare-mongering and negativity, which will also recede once the election is over,” he noted.

On the sell side, some sellers that have been holding off, pending the outcome of the US elections because of the potential for lower capital gains taxes, will now push the button, said Hall.

“These new processes will translate into deal activity during the second half of 2013,” he said.

Zachariades characterises the current chemical M&A environment as buoyant from a transaction volume standpoint, but slightly lower in terms of dollar value of deals.

“The sub-billion dollar market is holding up very well as CEOs continue to look for more bolt-on opportunities versus transformational or opportunistic step-outs,” Zachariades said.

“From a global perspective, Asia continues to be highly attractive, both for in-bound and out-bound M&A, and Europe also remains active despite all the doom and gloom reported in the press,” he added.

Over the last five years, around 35% of all global M&A involved an Asia or Middle East player, with 15% being on the buy side, according to The Valence Group.

“We see that trend not only increasing but accelerating, with levels likely to reach 50% in the next 5-10 years,” said Zachariades.

In the US, where cheap shale gas is revolutionising the chemical sector, the banker also sees greater activity in the commodity chemical sector in years to come.

This year has seen polyvinyl chloride (PVC) producer Georgia Gulf agreeing to merge with PPG Industries’s chlor-alkali business in a $2.1bn (€1.6bn) deal, and two competing groups battling to buy out butadiene (BD) producer TPC Group.

“The interest is being driven by low-cost shale gas, and we believe there will be more activity in certain sectors of the commodity chemical market that stand to benefit from this phenomenon,” said Zachariades.

“The resurgence of the US commodity chemical industry has certainly been a highlight of the year, and we see that continuing into 2013 and perhaps beyond,” he added.

While overall chemical M&A activity is likely to rise regardless of who wins the US presidential election, the flow of deals between the US and China may be influenced by who wins, said Hall.

“Romney has been very vocal in describing China as a currency manipulator and has said he will take a tough stance on China’s commercial practices. This has not gone unnoticed by the Chinese CEOs and business owners that we deal with,” he said.

“An Obama win is likely to be positive for M&A flows between the US and China, whereas a Romney win may lead to increased economic tension between the two countries, at least in the short term,” Hall added.

The banker said a Romney win may cause Chinese acquirers to be more reluctant to invest in the US through M&A and may reduce the Chinese government’s willingness to support acquisitions of US companies by Chinese companies.

“Chinese business leaders who are looking to make acquisitions in the US are also closely watching the developments on the two Chinese telecommunications equipment giants Huawei’s and ZTE’s deals being blocked in the US,” said Yuan Peng, partner at The Valence Group, based in Shanghai.

($1 = €0.78)

By: Joseph Chang
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