June 2010 Archives

Mergers and acquisitions in the global chemical realm are heating up, despite concerns about the European debt crisis and a slowdown in China.

Last week, BASF agreed to buy German specialty chemical firm Cognis from its private equity owners for €700m ($862m), while US-based Corn Products International announced its $1.3bn acquisition of National Starch from AkzoNobel. And Bain Capital just closed on its $1.63bn buyout of Styron from Dow Chemical on June 17.

In the BASF/Cognis deal, the total enterprise value (EV) including the assumption of debt and pension obligations comes to €3.1bn. Based on Cognis having generated €422m in adjusted earnings before interest, tax, depreciation and amortization (EBITDA), BASF is picking up Cognis for a relatively modest transaction multiple of around 7.3 times EBITDA - about the average for specialty chemical deals in 2009 based on US investment bank Scott-Macon's estimates.

The price being paid is healthy but far from frothy. In the M&A bubble days of 2006 and 2007, buyers were paying over 10 times EBITDA for these assets, according to US-based investment bank Young & Partners.

Today's M&A valuations, which are based on more stabilized earnings over the past year, are conducive to deal-making. There's enough in it for both buyers and sellers.

And these valuations are unlikely to rise much higher based on the current state of public equity markets. Using JPMorgan estimates, US chemical stocks with a substantial specialty component trade at about 7 times projected 2010 EBITDA.

Photo credit: www.robertfinkelstein.wordpress.com

The BP oil spill in the US Gulf will have major implications for the US chemical market. Yes, the chemical industry is not the oil industry, but they are inextricably linked - not just in terms of feedstocks, but also how they are perceived in the minds of the general public.

The direct impact of the spill on the chemical industry will be the restriction of oil and natural gas feedstock and energy supplies stemming from the moratorium on new offshore drilling and other potential policies.

But the indirect impact has far more potential for damage. As one astute executive at the American Chemistry Council (ACC) annual meeting in Colorado Springs in mid-June pointed out, the BP disaster highlights the inherent risks of all operations and puts into play the precautionary principle - where the burden of proof that something is not harmful is put on the producer/operator.

This could impact US chemicals management policy, and the ACC is rightly concerned (see story on page 17).

"A global, high-profile industry has lost the trust of key stakeholders, and I suspect that many industries have been tarnished in the process," said Brian Ferguson, executive chairman of US-based Eastman Chemical and chairman of the ACC. "American institutions face a crisis of trust, and the chemical industry and our products remain at the front, or near the front of the line."

On a positive note, the buzz from CEOs and other senior executives at the meeting was that sales and earnings are holding up well so far, even in the face of the European debt crisis and worries over a potential slowdown in China.

Coming off a robust first quarter, where profits of many global chemical companies swung ever closer to prerecession levels, there was no talk of a loss in momentum. Sales in Europe are holding steady, while strong growth continues in Asia and Latin America. There are also pockets of strength in the US, such as in the automotive and electronics markets.

While the unemployment rate remains stubbornly high in the US at 9.7%, those that have jobs are feeling more confident that they will continue to be employed, and are loosening up the purse strings, according to some executives.

Although the world is more connected than ever and the decoupling argument was smashed in the global recession of 2008-2009, the CEO of one of the largest global chemical companies expressed optimism that this time, it truly is different - that the European crisis will ultimately be contained.

Photo credit: Time