03 March 2014 14:29 [Source: ICIS news]
LONDON (ICIS)--The quest for growth, increased private equity activity and more interest from activist investors will fuel chemicals mergers and acquisitions (M&A) activity to levels not seen since 2008, according to M&A advisors The Valence Group.
With a nascent recovery in the global economy, companies are hoping to boost existing low levels of revenue and profit growth by using M&A, says Valence partner Anton Ticktin.
He said: “Companies have very strong balance sheets, but the big issue, even in the US, Europe and now Asia, is growth. Companies need to find extra growth to fuel revenue and profit stream.”
In Europe, where the economic downturn has reached a turning point, companies are looking for extra fuel to help grow their businesses, he believes.
So now businesses in a position to do so are considering initial public offerings (IPOs), to take advantage of high valuations.
Trading multiples in chemicals have increased from an average 8.1 times EBITDA (earnings before interest, tax, depreciation and amortization), to around 10 times EBITDA.
This is 1 to 1.5 times higher than the last 15 years, and is inflating the valuations of public companies.
“Private equity is back with a vengeance and they have access to debt which is relatively cheap, and we’re seeing some of the same conditions that we saw back in 2006-8. This is playing a part in fuelling extra demand for M&A in chemicals.”
He points to increasing activist investor activity in chemicals, especially in the US where companies such as Ashland, DuPont, Dow and most recently, flavours and fragrances group, Sensient, have activists either trying to get onto the board or at least making representations for management to alter company strategy.
“All of these put together will make quite a difference to 2014, especially compared to the middle of 2013 and the last part of 2012,” he said.
Thanks to cheaper feedstocks, upstream, European chemical companies are operating at a competitive disadvantage to their Middle East and US peers.
To maintain profitability many companies are seeking to move further downstream, says Ticktin. So European companies are exiting or considering the future of their upstream businesses and moving downstream to compete on a more level playing field with companies in other regions.
There have already been large transformations in the thinking of some European companies such as BASF, DSM, and even AkzoNobel, which are actively looking at going further downstream and protecting their position with more service and technology-driven businesses.
“You see that in France, Germany, and the UK to a certain extent. But certainly in the main markets of Germany and Holland we’re seeing quite a lot of more activity to move downstream.”
Shale gas impact
The US shale gas phenomenon is opening up new opportunities for US chemical groups, which have now moved up to comparable feedstock economics for ethylene production to the Middle East.
Ticktin says that companies such as Dow, which had no upstream advantage five years ago, now have a huge one.
Groups such as Huntsman, Dow and Westlake have all have benefited from shale gas and now have options to move downstream or upstream. Shale gas is increasing the imperative for European players to move downstream.
The way the structure of chemical companies has developed over the decades makes them perfect for the attention of activist shareholders or company executives seeking to maximise profits and shareholder value, says Ticktin.
“Because of the way chemical companies run their businesses like portfolios, and because each product is almost a different industry in itself, it’s easy to see how a company should split its portfolio into more market-driven businesses rather than a portfolio structure.”
Over 20-30 years or longer, the industry has developed along product lines linked back to common feedstocks, and this is how many companies are structured, rather than being divided by end-use markets.
“You don’t need to have the product linkages anymore and you can split off whole business units or segments. Therefore the argument from a lot of activist investors is that you’d have a lot more shareholder value by running those as separate businesses or consolidate in that market area so that you optimise margins and shareholder value,” said Ticktin.
He believes that the chemicals industry is probably unique because it grew from a core into such a broad selection of products end markets that don’t necessarily.
Valence divides the industry into 33 segments and 200 product class areas. “You can see how the chemical industry - for an activist investor – becomes an obvious target because of that heavy segmentation and fragmentation downstream.”
He added that activist investors will be most active in the US simply because of the way markets and shareholding structures work there. It’s harder in Europe where you have different markets, regulations and shareholding structures such as preferential shares.
“The US is an easier target for the activist investor,” he said.
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