INSIGHT: Maturing debt and cost of shale plans can accelerate M&A

02 October 2013 17:44  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Think back to the last peak in the chemicals cycle. It seems a long time ago but between 2006 and 2008 producers were on a roll. And in more ways than one.

Senior executives were talking of a plateau of earnings performance and heralding the end of cycles, the chemicals cycle among them. Cost volatility was an issue but demand growth was strong, with the caveat that firms might have to ride a few peaks and troughs along the way.

Sector firms also embarked on a merger & acquisition (M&A) spending spree. Following the 2001/02 downturn, cash was flowing strongly enough for producers to think of expanding. Private equity players were a major force in the sector and seen as a catalyst for great change. Private money helped to push up deal multiples.

But we all know that the next few years turned out to be very different. Perhaps we can learn from this and understand that the future may unfold in the way we least expect - the wise company has some credible, up-to-date scenarios tucked away in its back pocket.

And actions produce reactions and consequences that we might not always fully appreciate.

The build up in M&A activity between 2006 and 2008 is driving a wave of debt repayments that will come due between 2013 and 2016, AT Kearney said in a sector study published this week.

“This comes at the same time that increased US shale gas is leading industry players to seek project financing for up to 10 world-scale cracker and derivative plants,” the consulting firm added.

Taken together, the burden on companies might be severe and the suggestion is that it is likely to force more restructuring and the growth of players from the Middle East and Asia.

“Measured against the period from 2000 to 2005, the debt build up that occurred in the chemicals industry from 2006 to 2008 was extraordinary," AT Kearney said.

“The industry conducted deals worth more than $330bn over that period, with the majority of deals valued at more than $5bn. One result is that debt repayment is concentrated over the next few years, with levels of $22bn to $26bn through 2015 leading to a peak of $33bn due in 2016.”

Given the levels of investment needed to satisfy planned production plant construction, predicated on the back of the expected ready availability of cheap natural gas liquids in the US, the idea of greater sector M&A activity emerges.

The need for re-financing and the pull of project financing may also come around the time markets begin to turn down again. The global wave of capacity additions, not simply the wave of new construction in the North America, will have an impact on supply/demand balances.

“The large round of project investments may be followed by a cyclical low in commodity markets driven by over building in the United States and globally in select markets,” AT Kearney said.

Chemical companies keen to strengthen balance sheets prior to refinancing are likely to be involved in further portfolio restructuring, opening the door for more M&A activity involving companies from the Middle East and Asia, the consulting firm believes.

“Financing capability will become an important M&A driver both for sellers and buyers,” study co-author Andy Walberer said.

“That trend, combined with shale gas driven investments and strategies, will create new catalysts for deals in the chemicals sector in the coming years."

The impact of the shale revolution on M&A activity in chemicals is already apparent. Industry giant Dow Chemical, for instance, intends to focus its portfolio still further on added value materials and specialities by divesting more businesses and re-aligning to grasp shale oil and gas-driven opportunities.

M&A activity currently in the sector in the US is fairly strong with Dow Chemical, DuPont and specialties maker Ashland among firms having businesses under review.

Chemical companies headquartered outside North America also are keen to establish a feedstock- and energy-competitive foothold in the region.

M&A activity in chemicals is expected to increase driven by a number of factors as companies react to new global feedstock and cost realities and changed market growth.

Chemicals M&A advisors the Valence Group, for instance, sees the most significant long-term trend in the sector as the move by companies headquartered in the Middle East and Asia into intermediates and specialities. The impact is being seen on products such as caprolactam and isocyanates.

This challenges European producers particularly, which have tended to move even further downstream into specialties.

In the US, the exploitation of shale gas and oil will colour the M&A environment but non-US firms may still make moves to capture more business among a wider range of intermediates.

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By: Nigel Davis
+44 20 8652 3214



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