EPCA ’15: Europe’s chemical M&A nears peak

Focus article by Will Beacham

BERLIN (ICIS)–Chemical industry merger and acquisition (M&A) activity in Europe may be peaking, with a limited supply of good-quality assets being chased by corporate and private equity (PE) firms looking for growth and investment opportunities.

In this environment, valuations are increasing to levels seen by some as a maximum in the current environment. The situation is not thought to be as bubble-like as 2007-2008, however, as most companies are more prudent in their research and evaluations.

There are plenty of companies in Europe looking to bolt-on downstream assets and/or to exit upstream. Significant restructuring and spin-offs in chemicals are also being driven, in part, by activist shareholders.

DSM, for example, is under pressure from activist Third Point, led by Dan Loeb. It is partnering its caprolactam and acrylonitrile businesses with CVC Capital Partners in a deal announced in March 2015. In July, DSM also sold its interest in a maleic anhydride and agrochemicals joint venture to PE fund Ardian.

According to Anton Ticktin, partner at investment bank the Valence Group: “The market is booming in a stronger macroeconomic and chemicals environment. People are looking for growth but it is not so easy to find. Companies are cash-rich but have a problem with growth. They can’t keep returning money to shareholders.”

He points out that the euro/dollar exchange rate favours US companies looking at Europe.

The weak euro is a buying opportunity and Germany, France, Belgium and Spain are all performing strongly in M&A terms. Trading multiples are the highest they have been for 15 years, so a lot of companies thinking of selling are bringing assets to market now.

Ticktin believes multiples may not increase much further and may eventually decline.

“This could be the peak of the market and it could last for 12-18 months. We are nearing a peak in valuations which are not crazy but there is strong buying sentiment, strong balance sheets and the market is not overheated,” he says.

Although there could be fallout from the macroeconomic environment, chemicals remains strong, he says. Eric Vogelsberg, who leads Kline & Company’s global M&A and corporate development practice, says the deal flow for him and his clients is still very robust globally.

With earnings before interest, tax, depreciation and amortization (EBITDA) for multiples in the low-tomid double digits, he says now is a good time to sell but not to buy. In a more rational market EBITDA multiples of five to seven or up to 10 are more usual.

PE is driving a lot of this activity with firms continuing to raise funds unabated. This includes big overseas and domestic funds as well as small and mid-sized funds. There are also funds which need to be reinvested.

“It’s one of the best times to sell a business. Some clients are diligent and methodical in their approach but have not made an acquisition in a year or two. If a fund still has 80% dry powder, then that is problematical,” says Vogelsberg.

In such a robust environment there are more non-domestic investors in the US. Vogelsberg says that in his 30 years with Kline he has never seen a market like today’s in terms of multiples and the level of competition.

There are a larger number of sponsor-to-sponsor deals exchanging assets between different PE companies, and multiples are going higher and higher. “We must be close to a cap. You will reach a point where even if you streamline and cut costs it will be difficult to make a return on a 15-16 times EBITDA acquisition.”

However, the environment is not yet as frenzied as in 2007-2008, he says. Then multiples were even higher, so there is a more rigorous and diligent approach now. The average hold time for a fund is three to five years but that increased to seven to 10 years during the crisis. Now some are exiting after two to three years to realise a significant gain.

There are more deals now where PE has not succeeded, opening the door to strategic buyers instead where there is more opportunity to generate synergies. “PE firms are very astute managers of businesses but at these kinds of multiples they are hesitant. However, if the fund is fallow there is increasing pressure to do a deal.”

Vogelsberg believes that although economic growth may not exceed 2-4% you can still find 5-10% growth in a company if they have innovative technologies. He is also seeing more clients investing in regions which are just beginning to develop, such as Africa. There will be more industry and development in Africa outside of South Africa.

Consultant Mark Hanrahan, director at PricewaterhouseCoopers (PwC), says financial investors want to get their hands on a platform asset with reasonable scale. The big producers, meanwhile, are establishing positions in developing markets or infilling with bolt-on acquisitions.

The M&A environment in London is significantly up on 2014 in all sectors, according to Hanrahan. Industrials have picked up significantly in the last six to 12 months, reflecting an improved European economic environment although uncertainty surrounding Greece could challenge that.

First-quarter chemicals M&A was slightly up compared to Q1 2014 but down compared to the back end of 2014. In Europe there were no deals bigger than €50m and no transformational deals like have been seen in the US.

Uncertainty over demand has weighed on Europe M&A, but the drop in the oil price has made European and US cracker margins more comparable. “It’s making the European sector perform a lot better and allows for deferment of M&A activity related to restructuring or distressed assets,” says Hanrahan.

He believes the lower oil price improves the attractiveness of consolidation/restructuring, such as the chlor-vinyl and styrene moves by INEOS. The low oil price is not a driver for M&A but is a reprieve and deferral of the need for restructuring in Europe. The quality of assets coming to the market is also a constraint.

European majors are trying to carve out underperforming assets and hold on to specialty assets, according to Hanrahan.

Uncertainty over China is impacting demand for industrial products, which are a key end use for chemicals, and this could impact M&A activity in Europe and globally too because of fears about demand growth.

“There is an explicit strategy to control the [Chinese] economy so we are unlikely to see a return to previous stimulus programmes. China was the saviour of the global economy during the downturn but now it is becoming more self-sufficient.”

China’s new lower growth range will change attitudes towards the country. Some companies have struggled to get a return on their investment and all players will have to re-evaluate their strategies on China, he notes.

With European chemicals’ corporate balance sheets healthy, high levels of corporate M&A activity will continue to be seen. “There was prudence on leverage and reserves but now there are expectations of shareholder returns. M&A is a key lever to drive that.”

The full version of this article was published in ICIS Chemical Business in a special feature prepared for the 49th EPCA Annual Meeting 2015.  It can be seen clicking here. For more information and articles from ICIS at EPCA 2015 click here.