INSIGHT: M&A dilemma for Europe’s smaller chemical distributors

17 July 2013 10:32  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--In the current chemicals operating environment, the path to growth for the smaller chemicals distributor is far from clear.

Squeezed at the bottom, these firms are more exposed than some of the larger operators to market volatility, lower turnover and reduced margins. Current market conditions are difficult to say the least.

Yet many are quite happy to be where they are, having carved out a geographical niche or one that is focused on a small range of chemicals or chemical types. Their major concerns centre on how they might be able to grow the business or, alternatively, monetise what they have.

“By definition, distribution is a local business. It’s a relationship business and you have to fight for every order,” says Guenther Eberhard of DistriConsult.

Chemical producers might want to rationalise their supply chains, or reduce their ‘channel footprint’ and work in Europe through a smaller number of distributors but there are limits to the effectiveness of this approach.

Different countries and different markets sometimes need to be tackled differently and one size by no means necessarily fits all.

“The big producers are trying to push more through distributors,” Eberhard says. “So, overall, sales are probably moving sideways for a while.”

This makes it difficult for players who, while they might not want to grow much larger, do have to operate in a more sophisticated and demanding environment. Even if they are focused on a small range of chemicals or a relatively small geographic area, they need the returns to be able to invest to match regulatory and market demands.

Eberhard has argued for some time that size matters in chemical distribution but mainly to maintain the critical mass needed to cope with the ever-increasing fixed costs burden.

“This appears to be going even further, in the sense that companies must make sure they really grow their presence to make sure they do not ‘get stuck in the middle’, he said in an article published this week in ICIS Chemical Business (ICB) 

“Distributors must either be big enough to develop and maintain a broad and comprehensive geographic coverage of large parts of Europe's core industrial areas or they must concentrate on an application specialisation, serving only certain industries. That allows them an expert approach with a high technology focus. Only then can smaller companies stay competitive and remain on the leading edge of the industry.”

The larger chemical distributors – ICB published its listing of the Top 100 chemical distributors this week – are looking to grow mainly in the faster growing economies in Asia and Latin America with the US also providing some opportunities as the shale gas boom needs more blended and formulated chemical products.

In Europe, the big players can grow through small add-on acquisitions and there are owners ready to sell, but only as long as the price is right.

“Owners of smaller companies will acknowledge in private discussions that strategically a sale might make sense, but then they face the challenge of what to do with the money in times of low returns in money markets or from bonds,” Eberhard says.

And there is a limit to what can be achieved in terms of the size of a company. “Even the large groups must be nimble and flexible enough to cater to a variety of local customer needs, while at the same time maintaining uniform, solid and efficient logistics, IT and supplier management processes, to keep complexity and hence cost-to-serve under control,” he adds.

The margin squeeze makes business life difficult so players have to make sure they don’t find themselves in an indefensible position.

“So M&A transactions may be another option to grow for strong and determined players," the consultant says.

"On the flip-side of the coin, M&A may be the sensible exit opportunity for the ones that find themselves in an awkward situation where they can no longer compete in the top league.”

Read Paul Hodges’ Chemicals and the Economy blog
Bookmark John Richardson and Malini Hariharan’s
Asian Chemical Connections blog

By: Nigel Davis
+44 20 8652 3214

AddThis Social Bookmark Button

For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.

Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.

Printer Friendly

Get access to breaking chemical news as it happens.
ICIS Global Petrochemical Index (IPEX)
ICIS Global Petrochemical Index (IPEX). Download the free tabular data and a chart of the historical index