INSIGHT: Step-out or growth-driven M&A is most admired

12 May 2014 15:56  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS)--Bolt-ons or step outs. Which do you most admire?

Chemical industry executives and their advisors tend to appreciate the latter: the sort of deals that drive growth and change the face of a company. They like the way such deals can shift the game in certain markets and lift investor opinion.

“Competitors, advisors and investors appear to reward bolder growth-driven M&A [mergers and acquisitions], especially as the chemicals industry, particularly in Europe, is searching for growth,” says advisory firm The Valence Group.

“M&A activity which repositions portfolios towards growth areas is likely to be viewed more positively. These transactions also seem likely to be most rewarded by investors,” it adds.

The company asked senior executives and advisors across different regions what they thought about recent chemicals M&A deals. It was looking for the transactions most admired and respected.

Step-out or growth transactions were mentioned the most. These are the sort of deals where companies acquire larger businesses in adjacent or sometimes new segments.

Feedstock-advantaged acquisitions are largely step outs, Valence says. Deals such as Albemarle’s acquisition of AkzoNobel's catalysts business, DuPont’s acquisition of Danisco, BASF of Engelhard, ChemChina of Mahkteshim-Agan and Clariant’s acquisition of Sud Chemie were all cited in its survey, the advisory firm adds.

They were “bold and successful in repositioning the growth prospects of the company,” and they improved the perception of investors, although in some instances that may be too early to judge.

As the feedstock landscape for upstream petrochemicals changes with the shale revolution in North America it is not surprising that deals such as that between Georgia Gulf and PPG in vinyls and the IPIC investment group from Abu Dhabi’s acquisition of Canada’s Nova are seen as transformational.

“In most cases, [with all these transactions] the timing was mentioned as critical,” Valence says. “Surprisingly, the value paid or multiple was rarely mentioned as being important, perhaps as the longer term transformational aspects were regarded as more relevant.”

A deal can be both successful and unsuccessful depending on what metrics are used. And the parameters used to categorise a deal can be partially subjective, Valence notes.

More quantitative measures such as share price, trading multiple or return on capital cannot really incorporate the impact on the external environment of not having made the transaction. The company calls this “the risk of doing nothing”.

Some producers, uncertain of the value of a transformative deal in the recent difficult economic, financial and business environment, have focused on bolt-on acquisitions as a boost to growth. And while this type of deal is not always so highly regarded by others in the market, observers and investors tend to scrutinise the multiples paid more closely.

“This outcome is contrary to expectations as acquisitions of competitors in the same market/product areas would be assumed to be relatively straightforward and more likely to succeed,” Valence says. 

As the M&A market heats up so the pressure to do something builds.

The statistics suggest that the pace of M&A in chemicals globally will pick up this year given the portfolio restructuring that has already been announced by some firms and a more attractive financial and business environment.

Chemical company balance sheets generally are strong and debt is cheap. Private equity remains competitive in the market.

The number of M&A transactions in chemicals continued to rise towards the end of last year, with more larger deals completed in the first quarter of 2014, the Valence data show.

The company looks at M&A across the breadth of the chemicals industry. Fine chemicals and custom manufacturing M&A is back in the spotlight, it says, for instance, after successful restructuring in the segment and amid strong agrochemicals growth. M&A activity is driving share prices higher in segments such as inorganics.

Valence expects chemicals M&A activity globally to hit a three-year high in 2014 and soon to match the 2007 peak.

European producers could do quite well in this more active period for chemicals M&A, Valence partner, Anton Ticktin, suggested in ICIS Chemical Business (ICB) last week.

Forced to increase their focus on downstream segments, particularly as Asia and Middle East-based players become more active in the chemicals markets, the larger producers might be expected to continue to acquire business downstream while divesting upstream assets.

“The surprising consequence of this could be an even stronger European chemical industry,” Ticktin said. “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.”

Growth and bolt-on acquisitions

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By: Nigel Davis
+44 20 8652 3214

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