INSIGHT: M&A activity increases on improved chemicals confidence

02 May 2014 15:09  [Source: ICIS news]

By Will Beacham

After several years of lacklustre activity in global chemical mergers and acquisitions (M&A), improved confidence in the wider macro-economic situation and new pressures caused by phenomena such as US shale gas appear to be boosting the market.

An upturn in the global economy, feedstock and energy trends, strong balance sheets and cheap finance are all driving a resurgence in chemicals M&A.

ICIS is launching its ‘Top M&A’ listing. This new analysis breaks down the sector’s major completed deals in 2013 by close date, price paid and sales of the target asset.

Based on 2013 data, the largest on the list is Ecolab’s $2.30bn acquisition of oilfield chemicals and services group Champion Technologies. The third largest deal was Solvay’s $1.34bn purchase of Chemlogics, which also specialises in oilfield chemicals and services.

This highlights the impact of US shale oil and gas developments on M&A, a trend which is likely to continue for some years. Europe-focused companies are trying to grab a piece of the shale gas action through acquisitions: another example from the list being Brenntag’s $42m acquisition of US oil and gas lubricants and chemicals business, Lubrication Services (LSi).

Some European companies are also using M&A to reduce their exposure to the region’s high feedstock and energy costs compared with the US and Middle East, driven by cheap gas in those regions plus EU energy taxes.

This year, Solvay is trying to close a deal with INEOS to merge their chlor-alkali divisions. The EU is due to make a decision on this later in May. To have any hope of competing on the global market, energy intensive sectors such as this in Europe are using M&A to create businesses with the scale and cost base to compete with cost-advantaged regions.

To combat the impact of high energy and feedstock costs, European groups are also trying to move from commodities into more service-driven or value-added products. Examples of this include BASF’s acquisitions of US enzyme group Verenium and German superconductor technology company, Deutsche Nanoschicht.

The ongoing trend for M&A to help US and European groups tap into emerging market growth is also evident from the analysis. Some good examples include Brenntag’s acquisition of Indian distributor Zytex Group and Clariant’s purchase of China-headquartered organic pigments company Jiangsu Multicolor Fine Chemical.

According to specialist investment bank, The Valence Group, M&A activity is likely to hit a three year high in 2014 and could soon surpass the 2007 peak.

Apart from shale gas and the drive to boost revenues in low-growth environments, Valence highlights strong and increasingly healthy balance sheets, a plentiful supply of low-cost debt, activist investors and highly competitive private equity.

Valence believes that with increasing levels of activity, valuations will remain robust. Trading multiples have already reached 15-year highs as investors believe shale gas and better economic fundamentals will combine with low interest rates.

Partner Anton Ticktin says Asian and Middle East companies will move beyond commodities and further into intermediates, forcing established groups to realign their strategies and portfolios.

US companies are expanding upstream and downstream to maximise exposure to their energy and feedstock advantage. Transformative, ‘step out’ deals will allow companies to find growth or competitive advantage in areas such as food ingredients, agrochemicals, catalysts, oil and gas chemicals and the ethylene chain.

Ticktin believes the European chemical sector will soon be unrecognisable compared with just a few years ago with companies such as Solvay, BASF and DSM acquiring smaller competitors whilst divesting upstream.

“But the surprising consequence of this could be an even stronger European chemical industry: having been the first to act it could become the most sheltered from global competitors and actually benefit in the mid-term.”

The trend is seen by Cefic director general, Hugo Mandery, who, in an interview published on ICIS news on Friday, suggests that the industry’s problems of cost competitiveness are far outweighed by longer term opportunities and the sector’s ability to adapt and innovate.

ICIS also identifies its first ‘Deal of the year’, selected by senior ICIS editorial staff. This is Oman Oil Company’s acquisition of oxo-alcohols producer Oxea from private equity group, Advent International. With sales of €1.5bn tonnes/year ($2.1bn tonnes/year) in 2012 and 1.3m tonnes of capacity, it is estimated to be among the largest in chemicals in 2013 as well as being important from a strategic perspective.

Oxea, as created by Advent, has proved to be a successful operator. Oman Oil has acquired a platform for global expansion.

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By: Will Beacham
+44 20 8652 3214

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