ICIS Top M&A: M&A to transform chemicals

02 May 2014 10:06  [Source: ICB]

Amidst a dynamic global landscape, many chemical companies are racing to use M&A to make themselves fit for future growth and prosperity

Merger and acquisition (M&A) volumes are likely to hit a three year high in 2014, with the potential of soon reaching the 2007 high point (see top graph).

Several factors are now either underpinning confidence or providing an impetus for chemicals deals: companies looking to boost revenues in often low-growth environments, strong and increasingly healthy company balance sheets, a plentiful supply of low-cost debt, shale gas, activist investors and highly competitive private equity. If that was not sufficient, all regions are now actively and simultaneously repositioning their chemicals industries and employing M&A as one of the main tools to change their portfolios.

With this increasing activity, valuations will remain robust. Trading multiples are ­already at a 15 year high as investors believe shale gas and better economic fundamentals will combine with low interest rates.

Furthermore, transaction multiples which were more subdued, have now also started to rise above the historic average (see bottom graph). The combination of both high profitability and ­valuations could also result in increased transaction values.

Mid-term transformation
In the mid-term, the chemicals industry will continue to transform itself. Growing Asian and Middle Eastern companies are moving further into chemical intermediates beyond their initial commodity focus, forcing established chemical companies to realign their strategies and portfolios. The US chemical industry has seen companies expanding both upstream and downstream as shale gas has offered North American companies an unexpected feedstock and energy advantage.

In reaction, European companies have ­realised that exiting uncompetitive commodities and intermediates and moving downstream is quickly becoming the most viable option. The consequence will soon be a chemical industry almost unrecognisable from that of just a few years ago.

Much of this transformation will be achieved through M&A. The eventual “winners” are likely to be those who are early in reshaping their portfolios by acquiring some combination of performance chemicals, feedstock advantage and more service-driven chemical companies. Areas such as food ingredients, agrochemicals, catalysts or oil and gas chemicals and of, course C2 (ethylene chain) advantaged chemicals have all become target areas. Indeed many of these acquisitions are often so-called “step-outs”, driven by the need to find growth and/or longer term competitive advantage.

Step-out deals
Most interestingly, a Valence Group review of acquisitions in chemicals shows these “step-out” deals are the most admired by chemical industry executives (see transactions 1-16). Furthermore, these types of acquisitions are also deemed most successful by senior chemicals industry executives. Arguably these transactions have done most to reposition companies and increase value.

The result of this increased downstream focus and activity will be a consolidation in the so called “specialty” chemicals area. Companies such as Solvay, BASF and DSM will carry on acquiring smaller competitors while divesting upstream businesses. This expansion further downstream will result in even larger acquisitions as higher quality opportunities become increasingly scarce.

But the surprising consequence of this could be an even stronger European chemical industry – having been first to act it could become the most sheltered from global competitors and actually benefit in the mid-term. As a famous European philosopher wrote, “that which does not kill us makes us stronger” – a thought many European chemical companies hope is correct.

Download a pdf of The ICIS Top M&A here.

Author: Anton Ticktin

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