29 November 2012 18:48 [Source: ICB]
Following a slower 2012 where deal-making was hindered by uncertainty in Europe, China and the US political scene, next year should see a resurgence
Activity was muted this year but is set to bounce back
"It's been a slow year with the level of confidence and activity down. A confluence of events and conditions has led to a downturn," says Leland Harrs, managing director of US-based investment bank The Prince-Ridge Group.
"Talking with senior management at companies and private equity firms, we're finding the brew of the pending US fiscal cliff, the US elections, the Europe crisis and China economic slowdown, are gelling together as the reason we haven't seen the level of activity we expected in 2012," says John McNicholas, head of investment banking at PrinceRidge.
In the first half of 2012, deal activity fell sharply in terms of dollar volume, as few multi-billion dollar deals were completed, says Mario Toukan, head of the chemicals practice at US investment bank KeyBanc Capital Markets.
The number of US deals also fell in the first half, with just 40 completed - 21 in the first quarter and 19 in the second. The first-half total was lower than the 45 deals completed in just the first quarter of 2011. Activity picked up in the third quarter with 28 deals closed, he pointed out.
PENT-UP DEAL FLOW
However, next year holds more promise. "You get a sense that things are on hold. We believe there will be a reversal and that M&A [merger and acquisition] activity will pick up in 2013," says PrinceRidge's Harrs.
Private equity firms are looking for assets to buy and sell, transactions multiples are up, financing is available and chemical companies are seeking strategic deals for growth.
"The conditions are all there for increased activity. We are just short on the supply of assets for sale. There just aren't enough assets to satisfy demand," Harrs says.
"We see 2013 as a growth year for chemical M&A as more assets hit the market from corporate divestiture programs and both corporates and private equity firms seek to put cash to work," says KeyBanc's Toukan.
Much of the pent-up supply will hit the market in 2013 at a time when demand will be strong for quality chemical assets, notes the banker.
"Corporate cash balances are very high - in many cases over 10% of market capitalization. For these companies, the number-one priority is to make strategic deals," says Toukan.
The average EV/EBITDA (enterprise value/earnings before interest, tax, depreciation and amortisation) multiple on the most recent 45 chemical deals analysed was 9.5 times for strategic buyers versus 8.0 times for financial buyers, notes the banker.
Yet not all strategic deals get done at such high levels. In the last major high profile deal, US-based plastics compounder PolyOne agreed to buy US-based competitor Spartech for $393m (€309m), including the assumption of $142m in net debt. The deal represents an EV/EBITDA multiple of 7.4 times EBITDA in the 12 months ended 4 August, 2012.
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"Mega deals always result in non-core assets to be divested. A large number of these deals occurred in the past 12-24 months, and it often takes one to two years to sort things through," he notes.
While chemical companies continue to restructure, the level of activity and resulting businesses for sale, especially in the US, has not picked up in a meaningful manner, notes PrinceRidge's Harrs.
In Europe, Switzerland-based Clariant is seeking to divest its emulsions, detergents and intermediates, paper specialties, and textile chemicals business units by the end of 2013.
In the US, DuPont has already agreed to sell its automotive coatings business to US private equity firm Carlyle Group for $4.9bn, while Cytec Industries is selling its coatings resins unit to private equity firm Advent International for $1.03bn. Both deals are expected to close by the first quarter of 2013.
A stagnation or deterioration in economic conditions in 2013 could actually boost the level of assets for sale.
"We have seen relatively few distressed situations this year but it's possible that may change next year if economic conditions do not improve," says Chris Cerimele, director and head of chemicals at US investment bank Houlihan Lokey. "Many companies have taken out significant capacity in recent years but still suffer from softness in key end markets and other factors that continue to put stress on their business. We may see some firms reach their limits if demand does not start to recover."
There have been fewer of these auction deals with wide distribution to potential buyers. Two other pending high-profile deals in the US have been direct approaches from the buyer to the seller.
That includes polyvinyl chloride (PVC) producer Georgia Gulf's $2.1bn merger with PPG Industries' chlor-alkali business, expected to close in late 2012 or early 2013.
Georgia Gulf and PPG had been talking for months prior to the announcement of the deal in July 2012, sources in the financial community says.
Another example of a direct approach to a deal is the proposed leveraged buyout (LBO) of butadiene (BD) producer TPC Group.
Global investment firm First Reserve and US private equity firm SK Capital agreed with TPC Group on a buyout at $40/share in August 2012, only to be trumped by a bid by UK-based specialty chemicals company Innospec and US private equity firm Blackstone Group at between $44-46/share in October.
"Much of what we've been seeing lately in commodity chemicals transactions has been transactions driven by highly strategic considerations - PPG chlor-alkali merging with Georgia Gulf, Olin acquiring KA Steel," says Houlihan Lokey's Cerimele. "Some transactions have made a lot of sense on paper for several years and are finally being consummated."
US POST-ELECTION BOOST
US chemical M&A activity should get a boost following the US presidential and congressional elections.
"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," says Telly Zachariades, partner at global investment bank The Valence Group. "We are convinced that the global economy is already on the mend and that investment in new hiring, CAPEX [capital expenditure] and M&A will grow significantly in 2013."
Peter Hall, also partner at The Valence Group, based in London, notes 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. Now there will likely be a number of deals that will finally be pushed forward".
The end of months of political wrangling over the elections will also go a long way in boosting confidence among senior management, says 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 of scaremongering and negativity, which will also recede post election," he notes.
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, says Hall.
"These new processes will translate into deal activity during the second half of 2013," he says.
ASIA AND MIDDLE EAST
Valence's Zachariades characterizes 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 says.
"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 adds.
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," says Zachariades.
US SHALE GAS IMPACT
In the US, where cheap shale gas is revolutionizing the chemical sector, the banker also sees greater activity in the commodity chemical sector in years to come.
Shale gas dynamics may be driving the Georgia Gulf/PPG chlor-alkali deal and the proposed TPC Group deal.
"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," says 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."
Also related to the US shale gas phenomenon, the oilfield chemicals sector could be a hotbed of M&A activity in 2013.
"Clearly the US is in a fortunate position with growing shale gas production. Fracking and changes in the types of oilfield service required will drive interest in oilfield chemical assets," says Allan Benton, vice chairman and head of the chemical industry practice at US investment bank Scott-Macon.
In October, US-based specialty chemicals and services company Ecolab agreed to buy US-based oilfield chemicals producer Champion Technologies for $2.2bn, strengthening its position in the energy services market.
The deal, expected to close by the end of 2012, follows Ecolab's $8.3bn (including the assumption of $2.7bn in debt) acquisition of US-based specialty chemicals firm Nalco in December 2011, which brought it a major energy services business.
Benton also targets coatings as another hot sector for 2013, with interest boosted by the recovery in the US housing market.
"New housing construction rose in August, boosted by the strongest pace in single-family home starts in two years. That's going to be good for coatings and building materials markets," says Benton. "We see that recovery continuing into 2013. Sellers of coatings assets should get a good reception in the market."
So far in 2012, through the end of October, there were 25 specialty chemical deals closed for a total value of $20.4bn versus 50 deals totalling $62.4bn in value in all of 2011, according to Scott-Macon. In 2010, there were 43 deals for a total of $21.0bn in the sector.
PRIVATE EQUITY ACTIVE
Private equity firms should continue to be active as buyers of chemical assets in 2013, buoyed by a favourable financing market.
"There is every indication that 2013 will be a favourable year for financing. The Fed is committed to keeping rates low and there is great demand for debt as we've seen record issuance in the high-yield market," says PrinceRidge's McNicholas.
Private equity players have taken a greater share of the specialty chemicals M&A market in 2012, accounting for 29% of all deals on the buy side in the first half of 2012 - up from 16% for all of 2011, says Scott-Macon's Benton.
"Private equity funds are also sitting on a lot of cash, and right now, the financing market is wide open," notes KeyBanc's Toukan.
Cerimele of Houlihan Lokey sees "a good deal of pent-up demand among private equity for chemicals businesses.
The high yield financing market continues to be very strong in the US and is continuing to support leveraged buyouts of chemical businesses. We see this interest continuing into 2013."
Another result of the strong financing market is that companies have been refinancing debt for lower rates, better terms and more financial flexibility to make acquisitions.
"There are so many refinancings taking place that this can only drive more deals," says Toukan.
Brenntag continued its expansion in emerging markets
Distribution leaders Germany-based Brenntag, and US-based Univar and Nexeo Solutions, continued their push into emerging markets.
Thus far in 2012, Brenntag picked up a number of specialty chemical distributors in these markets, including Mexico-based flavours and fragrances distributor Amco for $18.5m (€14.5m), Australia-based ISM/Salkat Group (adding an estimated $119m in 2012 sales) and Latin America-based paints and coatings, construction chemicals and food ingredients distributor Delanta Group (sales of $24.3m in 2011).
In the US it acquired oilfield chemicals distributor Treat-Em-Rite (TER), and in Italy, fuel and oil additives distribution firm Petrolube.
Univar made no acquisitions in 2012, but under new CEO Erik Fyrwald, plans to increase capabilities in emerging markets such as China, other parts of Asia, Latin America, the Middle East and Africa. It aims to build upon its 2011 acquisition of Brazil-based distributor Arinos Quimica.
Nexeo Solutions formed a joint venture with Beijing Plaschem called Nexeo Plaschem to distribute polymers and chemicals in China.
In August 2012, US chlor-alkali producer Olin completed its acquisition of US caustic soda distributor KA Steel Chemicals for $328m. The deal represents an integration of the supply chain for Olin, as KA Steel was a major buyer of Olin products.
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