28 December 2012 14:20 [Source: ICIS news]
By Tom Brown
The market for petrochemical sector mergers and acquisitions (M&A) continued its rally this year, a trend that is expected to continue at least through the first half of 2013.
The momentum of the market is being sustained by large corporates seeking to expand through acquisition in the absence of strong organic growth, and other businesses moving to focus on their strengths in a difficult market and hive off strongly-performing but peripheral business units.
“The [M&A] market has been pretty similar to 2011,” said Constantine Biller, director of chemicals and industrials at UK-based Clearwater Corporate Finance. “The big feature is that, while there has definitely been a willingness among buyers and sellers to undertake transactions, they have often been difficult to complete for a number of reasons, including risk aversion, [a] lack [of] bank or financier appetite and general caution.
“We are probably going to complete a similar number of transactions [in 2012] to 2011, and it may be the same story going into 2013,” he added.
After a slow start to the year – following on from a lethargic fourth quarter 2011, when just $8.1bn (€6.1bn) of M&A dealflow was agreed – volumes ticked up sharply in the third quarter of 2012.
$20.2bn-worth of deals were agreed during the period – a 57% increase on $12.9bn seen in the second quarter of 2012, according to US-based PricewaterhouseCoopers.
The figure was driven by the re-emergence of another trend in M&A – the megadeal. Four transactions worth over $1bn apiece were agreed during the quarter.
All four deals concerned the acquisition of US companies, but two of the buyers are headquartered in Europe, underlining a move by European companies to expand their presence in North America. The region is benefiting at present from a more stable recovery than the eurozone, and from feedstock costs far below the European average as a result of the shale gas boom.
German chemical giant BASF agreed to acquire US-based seed treatment company Becker Underwood from investment firm Norwest Equity Partners (NEP) for $1.02bn in September, completing the deal in late November. German industrial gases supplier Linde completed the $4.6bn acquisition of US medical gases company Lincare in August.
The return of megadeals continued through to the end of 2012, with US-based PPG Industries agreeing to pay $1.05bn for the North American decorative paints business of the Netherlands’ AkzoNobel in December.
Despite the uptick in big-ticket purchases, the final deal value score for 2012 is unlikely to exceed that of 2011, according to PricewaterhouseCoopers global chemical analyst Antoine Westerman.
“If M&A activity continues at the same pace throughout 2012, deal volume could increase slightly compared with 2011; however, deal value is not expected to exceed that of the previous year,” he said.
Even if it fails to beat 2011’s total, the rally of the last three years is in sharp contrast to the general economic malaise gripping most of the western world. The last three years of global M&A activity have exceeded the last ten-year average, even including the banner year of 2007, according to M&A advisory firm Valence Group.
There are signs that European M&A dealflow may continue at the same pace in 2013.
There is likely to be increasing pressure on many quoted European chemicals companies to put the cash they have been amassing over the last few years to work. These war chests are estimated at up to 10% of total market cap in some cases, allowing for multi-billion euro takeovers, such as Clariant’s purchase of Sud-Chemie or Solvay’s acquisition of Rhodia.
The current economic environment, with static revenues and rising costs cutting deeply into the margins of some companies, may also lead to further consolidation of the industry.
“There are reasons for consolidation, particularly if businesses are underperforming due to poor management or poor strategy. There’s a very strong logic for those businesses to be taken out – and they will be,” said Biller.
Many chemical companies also benefit from comparatively favourable financing conditions. Although debt finance remains scarce compared to 2008, the international presence and end-market diversification of European chemical majors means that leverage is still relatively affordable, compared to other markets.
Private equity firms – historically avaricious acquirers of chemical company assets – also have strong reserves of cash. Many firms are struggling with ownership of portfolio companies extending far beyond the three-to-five year period that is standard for the industry – and with narrowing returns as a result of the increasing cost of debt finance since the onset of the financial crisis in late 2008.
Rival firms will have been encouraged by the extraordinarily speedy development of US private equity firm Apollo Management’s ownership of alkylamines producer Taminco. Apollo purchased the Belgian company from rival buy-out house CVC Partners in December 2011, and filed slightly under a year later to take the company public in a $250m New York initial public offering (IPO).
Asian buyers – increasingly serious contenders in bidding wars for chemicals companies – are also likely to be a significant part of the 2013 M&A landscape, according to the Valence Group.
“Asian buyers and traditional private equity firms are also actively seeking investments in a broader range of chemical sectors outside of their traditional focus,” the firm said in its October 2012 M&A newsletter.
“We are definitely starting to see emerging market players as buyers of large global chemical assets,” agrees Biller.
“Cash resources are often not a problem, and they have a strong desire for these assets. They’re buying products, intellectual property, technical know-how, routes to market, relationships with customers – as well as expertise that at some point they will want to repatriate to their own countries,” he added.
Valuations have often been a sticking point in completing deals, as firms that completed acquisitions at the top of the market seek to generate peak-level returns. However, five years since the financial collapse there is a growing pragmatism in the industry, Biller said,
While a strong presence in a high-growth market or a desirable product range may fetch a premium price, earnings before interest, tax, depreciation and amortisation (EBITDA) multiples of 5-7x may be more the norm in 2013.
Biller said: “The multiple that Solvay paid for Rhodia was only about 7.5x EBITDA, which probably was the fair price, otherwise Rhodia shareholders wouldn’t have agreed to it.
“But, whereas historically they would have said “you need to pay 10x EBITDA”, that scenario doesn’t really exist anymore unless you’ve got very unique products and access to these growth geographies – and presence in these really attractive end markets,” he added.
However, the performance of the European chemicals sector remains difficult to gauge in light of the macroeconomic difficulties facing the region. As the industry’s products are used in such a wide range of end-markets, the health of chemical companies is tied to the health of the economy.
This led to credit ratings agency Moody’s cutting its outlook for the sector to negative for the next 12-18 months, in line with a deteriorating European economy and a weakening recovery in the US.
"The decision to change the outlook [for the chemicals sector] was based on our revised 2012-2014 GDP growth forecasts. As a result, we forecast weaker domestic demand, particularly in Europe, and that slowing exports will exert pressure on the earnings of the region's chemicals companies."
The European recovery remains fragile, despite efforts of policymakers and central bankers, which have been ratcheted up far past the point of conventional monetary policy in a bid to stabilise the region. Any significant blow-out in the economy of any central eurozone power could have significant repercussions for M&A and the industry itself.
Even an optimistic report from bank HSBC, which estimated that Europe chemical companies outperformed the general European market by 11%, conceded that industrial production next year would need to grow by at least 12% to sustain the current level of expansion – a development that is by no means assured given the fragility of the global economic recovery.
However, strong cash reserves, interest from private equity and industrial investors, and the growing prominence of emerging market buyers are likely to buoy the ingoing and outbound European M&A investment going into next year.
The Valence Group said: “Despite macroeconomic uncertainty, chemicals M&A ended 2012 strongly and this should continue in 2013. Fundamental structural change, due to increased activity by Asian and Middle Eastern companies, is impacting the industry.
“With additional factors, such as low US gas pricing and strong company balance sheets, chemicals M&A is forecast to remain resilient for the next 5-10 years, with volumes well above historical levels,” it added.
($1 = €0.75)
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