Market outlook: Positive outlook for chemicals M&A

While chemical mergers and acquisitions (M&A) volume increased slightly in 2013, deal value increased by 47%, fuelled by sizeable private equity transactions. Further gains could be in store for this year, with renewed interest in cross-border deals, according to the A.T. Kearney Chemicals Executive M&A Report 2014.

Large players are divesting to focus on growth opportunities in specialty chemicals and to invest in scale in their most profitable businesses. In 2014, Asia is expected to be a hotbed of M&A activity, and alliances will become more common.

2013 M&A RECAP

Global M&A activity recovered slightly in 2013 compared to the multi-year low levels seen in 2012. Driven by multiple factors including a surging stock market, strategic investors’ strong balance sheets, private equity funding availability, and low cost of debt, 2013 saw a rise in M&A activity.

Rex Features Companies are divesting to focus on growth opportunities in specialty chemicals

However, due to a moderate global GDP growth rate of 2.1%, along with other uncertainties, the rise in M&A activity was moderate, with many potential transactions staying in the pipeline. In total, global deal volumes increased by 8% over 2012, but fell short of M&A peak activity levels of 2008.

In contrast to transaction volume, M&A deal value rose by 47% in 2013, driven by a rise in the number of large transactions. That being said, 2013 also fell significantly short of the peak value level seen in 2011.

The lack of megadeals (deals larger than $5bn in size) in 2013 made global M&A activity appear weaker than it really was. From 2001–2011, deals larger than $5bn represented, on average, 28% of the total value of chemicals industry transactions, but no such deal took place in 2013. This indicates that investors remain cautious amid persistently uncertain, if improving, economic and financial conditions.

Private equity companies remain interested in the chemicals sector and were active in buying chemicals assets. Their share of all chemicals transactions remained stable at about 20%, a consistent level since 2001.

In addition, the strong financing market with low interest rates and high availability continues to encourage private equity activities and their average transaction size continues to be above the industry average. Private equity firms were responsible for just over 30% of overall deal value in 2013, a consistent level since 2001.

Sector-wise, companies in the specialties and fine chemicals space are the most sought-after targets.

Between 2001-2013, deal volume remained relatively constant across all chemical industry sectors. However, in terms of value, specialty and fine chemicals deals have risen by more than $7bn since 2001, a compounded annual growth rate (CAGR) of almost 8%.

This reflects not only the large private equity deals in the specialty chemicals sector, but also the greater focus of Western and Asian companies on specialty chemicals, attracted by higher margins and lower cyclicality.

Competition is rising for buying specialty chemicals assets, which has translated into higher valuations relative to nonspecialty firms.

PORTFOLIO RESTRUCTURING

Starting in 2013 and continuing into 2014, many large chemical firms announced plans to realign their portfolios of businesses through spin-offs, divestitures, or joint ventures. Most sought to separate non-core or underperforming businesses to focus on higher margin, less cyclical specialty 
chemicals businesses with attractive growth opportunities.

Seven major companies in North America and Europe (Ashland, Dow Chemical, DSM, DuPont, FMC, LANXESS and Rockwood) are planning or have already completed separations of units with combined annual revenue of nearly $19bn.

Many of these announcements are likely at least partially influenced by the public pressure applied by activist investors. However, the breadth of announcements and the specific rationale for individual actions suggest that many companies are taking a fresh look at long-term industry trends and coming to the realisation that many of their businesses no longer fit and would achieve more value under a different ownership structure.

In North America, the number of transactions decreased by 3%, but increased in value by more than 50%. This was driven by much larger deals on average than in other regions, many of them with participation of financial investors. For example, the Carlyle Group bought DuPont’s performance coatings business for $4.9bn.

Companies from the UK, Germany, and Canada have been regular acquisition targets for US companies.

In Europe, the slow economic recovery, a lack of access to low-cost feedstock and energy, and the fact that underperforming businesses have been designated for sale, have led to more attractive valuations for those interested in Europe.

As a result, M&A in Europe gained speed in 2013, growing 21% in volume and 100% in value relative to 2012.

In Asia, the number of transactions increased by 7% and increased in value by 24%. Asia is becoming a key market for buyers, particularly for those in developed markets seeking to capitalize on the region’s growth and to gain direct access to Asian markets.

Asian acquirers are becoming more active, both in domestic markets driven by industry consolidation and in outbound transactions, seeking access to specialty chemicals know-how and pursuing global dominance in commodity chemicals by buying foreign companies at attractive valuations.

Overall, China continues to increase its dominance of the Asian M&A landscape. From 2001-2011, China accounted for 28% of Asian deal value, growing to 45% in 2012, and rising to 58% in 2013. This activity is supported by a few major Chinese players in the chemicals industry who performed large transactions, buying access to low-cost feedstock and shale gas technology in North America.

WHAT TO WATCH FOR IN 2014

A.T. Kearney surveyed leading chemical executives and M&A professionals in December 2013 and January 2014 to understand their expectations for future M&A developments. Against a background of higher global GDP expectations (2.9% in 2014 vs 2.1% in 2013), and relatively low M&A levels in 2012 and 2013 compared to the prior eight years, most participants expect stable to increased M&A activity levels in 2014.

The strongest M&A drivers mentioned by chemicals executives are:

1. High liquidity levels of chemicals companies,
2. Resurgence of the US chemicals industry because of low-cost feedstock,
3. Regional expansion plans of Asian companies pursuing growth through acquisition in Western economies
4. Western companies seeking access to developing markets.

Regionally, the survey results suggest increased M&A in all regions, especially in Asia and North America. The biggest increase is expected in Asia and China in particular, driven by the continued consolidation of the highly fragmented market.

North America is also expected to see increased activity due to foreign interest in access to low-cost feedstock and the large number of portfolio realignments announced by large companies in the region.

From a sector standpoint, specialty and fine chemicals are expected to see even higher M&A levels, while petrochemicals and basic chemicals will see a slight increase.

From a buyer perspective, industry professionals expect strategic buyers to continue to play the dominant role in 2014, followed by financial investors. The primary types of deals expected are those driven by consolidation and by regional expansion with business diversification seen as an unpopular deal type.

A final trend that is expected to continue in 2014 is the increase in alliances and partnerships between companies when pursuing larger deals and investments.

For example, there are many non-US or small companies interested in accessing low-cost US feedstock that cannot tap into the opportunity on their own. Instead, these companies are seeking to partner with others to bring additional funding or additional capability to bear in order to de-risk the overall acquisition or investment, enabling them to tap into important market trends.

• Andrew Walberer is a partner with A.T. Kearney and leads the firm’s chemical practice in the Americas. He is based in Chicago, Illinois, US and can be reached at andrew.walberer@atkearney.com.
• The full 2014 A.T. Kearney Chemicals M&A Executive Report is available here.