Chem M&A should remain active on portfolio shuffling

Interview story by Al Greenwood

HOUSTON (ICIS)–Chemical mergers and acquisitions (M&A) should remain active into 2015 as companies continue to manage their business portfolios and seek to pursue deals while interest rates remain low, an executive with PwC said on Thursday.

“There has been sort of a rush to the debt market now to take advantage of the favourable rates,” said Pamela Schlosser, US chemicals leader for PwC.

In the US at least, rates are expected to increase next year.

However, low rates are only one of the reasons encouraging companies to pursue deals.

In the US, chemical companies continue to divest businesses that no longer fit, Schlosser said.

She did not name any of these companies, in keeping with PwC policy, but several have recently made such announcements.

Earlier this year, Chemtura sold its agrichemicals business for $1bn to Platform Specialty Products, a company created to acquire companies.

Platform got its start in October 2013 when it acquired MacDermid, which produces specialty chemicals used in the electronics industry.

Dow Chemical is carving out its chlorine, chlorinated organics and epoxy resins businesses.

DuPont is divesting its Performance Chemicals segment, which produces titanium dioxide (TiO2) and fluoropolymers, which include the company’s well-known Teflon brand.

Huntsman recently closed on Rockwood’s TiO2 and pigments business − only pursue plans to spin it off in a couple of years.

Likewise, companies are eager to acquire businesses that fill out their portfolios. Earlier this year, A Schulman has completed its acquisition of the majority of assets of Ferro‘s specialty plastics segment for $91m in cash.

This general trend of acquiring and divesting should continue as companies manage their portfolios, Schlosser said.

Another trend driving M&A in the US is financial investors. Such investors made up 17.5% of the deal volume in the third quarter, according to PwC.

While this was down from the second quarter, it was up from the 2013 average of 12.0%.

Private-equity firm Permira recently agreed to sell agrochemical firm Arysta LifeScience to Platform Specialty Products for $3.51bn.

Private-equity firms are also acquiring companies as well.

A subsidiary of Arsenal Capital Partners recently acquired RTH Processing, a producer of ethylene-propylene-diene monomer (EPDM) granules, and RDT Manufacturing, a producer of rolled rubber products.

Private-equity deals create their own dynamic, leading to future M&A activity.

“At some point, as they look for potential exit strategies in these investments, that going to create more activity down the pike,” Schlosser said.

Looking ahead, shale gas could also drive chemical M&A deals in the US. It is already a factor among midstream companies.

One of the most prominent of these deals was Williams’s $6bn acquisition of Access Midstream Partners.

For the chemical industry, the advent of shale gas has given US producers access to low-cost natural-gas-based feedstock such as ethane and propane. This has given US companies a cost advantage against most foreign competitors, which rely on oil-based naphtha.

This cost advantage is so large, it should persist even as oil prices have fallen.

Foreign companies eager to benefit from this cost advantage may choose to acquire US companies, Schlosser said.

In 2012, Brazilian specialty chemicals producer Oxiteno acquired a plant in Pasadena, Texas, and the company continues to seek opportunities to expand in North America.

Outside of the US, another hub of M&A is China, according to PwC.

In the third quarter, China companies were responsible for some of the $1bn-plus deals that had taken place. China was also active in terms of volume as well as the value of deals.

“That is a pretty significant trend that we have been seeing at least as of recently,” she said.

Like their peers in other parts of the world, Chinese chemical companies are looking for ways to achieve economies of scale and to improve margins, she said. This is driving a wave of consolidation not just among chemical companies but among heavy industrial players in general, with larger companies acquiring smaller ones.

“If you look throughout 2014, you see a lot more Chinese companies coming into the equation,” Schlosser said.