INSIGHT: Chemical firms seek expertise in more active M&A market

02 April 2013 16:20  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Chemical companies in Europe have a lot to fix and players in Asia want to match the efficiencies and business practices they see in the west.

These twin factors, at least, are expected to drive chemicals merger and acquisition (M&A) activity in the near term.

Europe’s weak economic environment and uncertain industrial outlook are prompting more corporate restructuring. Portfolios are being realigned with added value specialities largely the target.

And there are many relatively new medium-sized chemical companies in China wanting to compete more effectively in a tougher international environment. One way or another they need to acquire the tools to do the job.

The number of M&A deals in chemicals last year was, perhaps surprisingly, only just under the number in 2011 and not far from the peak seen in 2008.

Data from M&A advisors The Valence Group show that the number of announced transactions in 2012 matched those in 2006. In terms of value, chemicals M&A deal making was relatively flat in 2012 compared with 2011.

Many chemical companies have the cash available to do the deal so it is economic and industry uncertainty, largely, alongside opportunity, that is holding them back.

It looked at times last year as if chemical industry M&A activity had stalled as Asia economic and industrial growth slowed and the EU remained constrained by the sovereign debt crisis.

Only in the US were financing conditions favourable enough and the outlook (for the chemical industry) good enough to prompt a healthy run of deals.

In 2013 we can expect much of the same, with the US market in terms of chemicals M&A probably back to where it was before the financial crisis.

There were 64 chemical sector deals with a value greater than $100m announced last year compared with 85 in 2007 and 60 in 2008, data from the Valence Group show.

The company records a much larger number of announced deals in the sector many with undisclosed value.

The big deals were lacking – just 14 deals with a value of more than $1bn in 2012 compared with 20 in 2007 – but that reflects the state of the market: widespread economic and industry uncertainty, and the need to protect cash flows.

The sector’s biggest companies, currently, appear to be happier to build strength in particular areas of business and consequently seem more interested in concluding lower value deals.

That having been said, transactions related to agriculture in one way or another have been dominant over the past year with ICIS recording a great many.

Chemical companies based in Germany, the US and Japan were active in M&A last year which might be expected given the size of their respective national industries.

The data show that activity inbound to Asia was quite strong with western firms keen to secure growth.

“The corporate world has to get growth, and where is the growth – it has to be Asia,” The Valence Group partner Kirk McIntosh says. “Bulk chemicals and intermediates growth prospects in the west are fairly limited.”

And while big players in the industry have been active in Asia for some time, there are many medium-to-small sized companies in the west that as yet do not have a coherent Asia strategy.

Inter-Asia M&A activity is fairly limited, as is M&A activity outbound from Asia but the latter situation is changing.

“As you move up the value chain you cannot just manufacture products," McIntosh says. “There is a service element.”

Even the largest chemical companies in the world struggle with this aspect of increasingly sophisticated, or customer-focused businesses, where the service element potentially offers a competitive advantage.

So a significant driver for M&A by growing China players, not the well-versed, state-controlled companies, is broadly the acquisition of technology and market access.

Western companies, for instance, have fundamental process knowhow that is attractive to producers from China and elsewhere.

And small-to-medium sized chemical companies in China want to cut costs and become more competitive because they operate in high cost markets. China players tend to be focused on production but there are many sub-sectors of the chemical industry where quality and reliability are essential. And building that quality and reliability within an organisation is not easy.

The Valence group has noted before the trends towards more chemicals M&A involving Asia players. Many are seeking process technologies and business process expertise.  

Some firms have yet to find their feet in the market and be comfortable in the bidding process but there is no doubt that their desire to do deals is becoming stronger.

Read Paul Hodges’ Chemicals and the Economy blog
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Asian Chemical Connections blog

By: Nigel Davis
+44 20 8652 3214

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