INSIGHT: Chemicals M&A activity will pick up in 2014

07 February 2014 17:09  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--There are deals in the pipeline and, with improved confidence in chemicals, many reasons why sector merger and acquisition (M&A) activity could increase.

The value of deals in chemicals continued to track down in 2013, indicative, perhaps, of the lack of confidence from management in the first half of the year.

But there was much greater activity in the second half which, coupled with higher stock market valuations, might indicate that buying and selling chemical businesses is coming back into vogue.

“The chemicals M&A market in 2014 could prove to be one of the strongest in the last 10 years. With activity markedly picking up in the 2nd half of 2013 the initial signs are that this will carry through to 2014,” M&A advisors, the Valence Group, said in a 2013 review.

Transaction activity has really improved in the past four months. Companies appear to be keener on driving deals through. Private equity can access relatively cheap debt.

There are common strategic threads running through the announced deals: Access to higher added value markets, technology, and a search for new growth.

Chemical companies in Europe, particularly, are struggling to find growth, although the problem extends to producers headquartered in the US. At least, the US chemical industry can capitalise on shale gas economics as some feedstocks become a great deal cheaper, energy costs fall and US manufacturing takes a turn for the better.

But there is a general feeling that this is not the right time to move on the big deal. Greater financial market confidence in chemicals could well prove to be fleeting if growth falters. The fact that firms are resorting to further share buy backs reflects the uncertainty that prevails across the sector.

One of the biggest deals in chemicals last year was the $2.4bn acquisition of Germany-based oxo alcohols producer Oxea by Oman Oil from the owner, private equity group Advent International.

Oman is developing a large plastics platform which integrates back to a cracker and to gas extraction and Oxea helps to provide significant downstream reach.  

Oxea, one of the largest producers of oxo-alcohols and oxo products in the world, was created in 2007 from businesses owned by now US-based chemicals producer Celanese and acquired for €408m by Advent International.

The sales to Oman Oil were clearly indicative of a trend. Middle Eastern and Asian players see opportunities to acquire technology and expertise from Europe. Private equity holders of chemicals assets are always keen to find the right buyer at the right price.

Valence says that 35% of the total number of chemicals sector M&A transactions in 2013 involved players from either Asia or the Middle East.

The firm’s review picks up on the growing confidence in chemicals M&A in 2014 and suggests that M&A activity this year could be the strongest since 2007.

Major chemical producers continue to realign portfolios adding to the view that deal making activity will increase. Companies like Dow Chemical, DuPont, Ashland, LANXESS, Chemtura and Rockwood Holdings are restructuring. And while not all this activity will result in M&A, a good proportion will.

Deal multiples remain very much in line with trend, the “transformational” deals being done at a relatively high premium with specialties transactions higher too. And if there is any direction being suggested by the data then it is that more specialised businesses are being more highly valued.

Consolidation in specialties is likely to be one of the most marked trends in chemicals in 2014 and for the rest of the decade, Valence suggests.

Read Paul Hodges’ Chemicals and the Economy blog
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By: Nigel Davis
+44 20 8652 3214



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