02 January 2013 16:29 [Source: ICIS news]
By Nigel Davis
LONDON (ICIS)--Increased merger and acquisition (M&A) activity in the second half of 2012, and particularly towards the year end, sets the scene for a fascinating 2013.
Chemical industry players continue to see M&A as a vitally important tool for generating growth. Even consolidation can be powerfully positive as it releases capital and other resources.
Also, more active chemicals M&A generally reflects a healthier sector and a management mindset that accepts the inevitability of change. In a world in which feedstock and other costs have become a particular burden for some, with low costs presenting opportunities for others, then more, not less, M&A activity must be expected.
The focus in recent years has tended to be downstream with corporate and private equity players keen to participate in the consolidation of largely specialty chemical industry segments. Private equity participation has been constrained since the 2008-09 crash although smaller deals have been concluded. Chemical producers and distributors, however, have sought further portfolio management, and while there was a fair degree of uncertainty around the middle of 2012 a number of important deals struck in the second half and towards the year end showed what could still be done.
The $4.9bn (€3.7bn) sale of DuPont’s performance coatings business agreed with the investment group Carlyle in the third quarter, was one of the largest deals of the year. In the second half PPG struck two strategically important deals in relatively quick succession. The $2.1bn merger of PPG’s chlor-alkali business with Georgia Gulf demonstrated that important commodity chemical assets could be traded successfully even in a particularly difficult operating environment.
PPG subsequently acquired the North American decorative coatings business from coatings rival AkzoNobel for an agreed $1.05bn, further strengthening its core businesses. The deal was welcomed by analysts following AkzoNobel because it took the Netherlands-based coatings major away from a particularly competitively challenged business while giving it the opportunity to focus resources elsewhere.
Swiss specialty chemicals maker Clariant was also able to agree the sale of textile, paper and emulsions activities, much earlier than expected, at the end of December, to SK Capital. The deal reflected a new-found dynamism in the sector and the fact that more players were more confident in the outlook.
The uncertain economic outlook plagued the sector in 2012 but the tax cuts agreement in Washington at the start of 2013 and the recent uptick in some leading economic indicators are encouraging.
A more positive economic outlook would play positively into chemicals M&A and be likely to help generate more activity in 2013. Importantly, too, financing is easier to come by and private equity firms can borrow at four times earnings before interest, tax depreciation and amortisation (EBITDA) giving them a greater degree of flexibility. This helps set the floor for deal multiples in the sector.
It is corporate players, however, that are likely to have an increasingly important role in sector M&A in 2013, and beyond.
Chemical companies have performed remarkably well over the past two years and some have considerable amounts of cash – as much as 10% of market capitalisation in some instances, according to estimates.
A greater degree of flexibility on all sides suggests that senior managers are in a better position now to consider mid- to long-term strategic moves. Short term priorities remain – such as Dow Chemical’s intention to divest businesses with sales of close to $1bn to help cut costs – but while companies might be expected to remain cautious there is no reason to be over-cautious.
It will be the growth and costs conundrum that drives chemicals sector M&A in 2013 and increasingly in future years.
US chemical producers might be expected to look to take advantage of their low-cost ethane feedstock and natural gas-based cost position in the coming years. European players and businesses constrained by costs might become prize assets for firms and investors seeking market access, technical understanding and intellectual property.
Financial analysts have talked about Japanese companies on the look out to diversify geographically to compensate for low growth at home. Japanese, South Korean and Middle East players are said to be showing more interest in western chemical company assets.
Certainly, chemicals M&A experts have pointed to the fact that Asia players have become serious contenders for some chemicals assets. They are expected to play a more significant role in M&A activity in 2013.
($1 = €0.76)Read Paul Hodges’ Chemicals and the Economy blog
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