Home Blogs Chemical Connections ICIS: Mergers and Acquisitions, will H2 be the new dawn?

ICIS: Mergers and Acquisitions, will H2 be the new dawn?

By Daniel Fletcher-Manuel on 30-Jun-2020

Given how slow H1 2020 has been from an M&A perspective, it is easy to welcome the $5bn INEOS/BP petrochemicals deal announced on 29 June as some sort of harbinger of a deal-ridden, pent-up demand driven summer.

However, let us be clear about this – the INEOS/BP deal has nothing to do with today’s market, nothing to do with market consolidation and nothing to do with the covid-19. Deals like these do not grow on trees and it is likely that it was signed and sealed in the halcyon days of 2019 and likely, as part of the oft discussed “Beyond Petroleum” BP strategy.

As Telly Zachariades, managing director of Piper Sandler Chemicals and Materials told my colleague Joseph Chang, the deal “is likely a one-off and not indicative of a trend of large oil companies divesting petrochemicals assets”.

It is also worth reflecting on the past relationship of BP and INEOS to contextualise this deal; the latter was formed in 1998 to acquire BP chemical assets. INEOS then bought BP’s Innovene business in 2005. Arguably, this latest announcement has been a long time coming.

Is seems fair to conclude that this is an isolated case and that we cannot interpret anything meaningful from the deal with regards to sector M&A in H2.

There *must* be a lot of pent up demand for M&A though, right?

In principle, yes. Valuations are reasonable low and off the back of a terribly slow Q2 (according to the FT, deals dropped to their lowest levels since 2009).

“The numbers are almost on par with the second quarter of 2009, when dealmakers were trying to get to grips with the fallout from the worst financial crisis in decades.”

For private equity firms, there is a lot of pent-up demand for deals even with less financing, but just not enough assets available.

“If private equity was able to get financing of 6x EBITDA (earnings before interest, tax, depreciation and amortisation) before and only 5x now, they are willing to make the difference by over-equitising now and refinancing later,” said Zachariades.

On the sell-side, the coronavirus crisis is unlikely to change the carve-out strategy on the part of corporates. Even during the crisis, some of these activities have continued, the banker pointed out.

“Following a busy and active Q1, as expected there was a significant drop-off in global M&A activity in Q2…though even larger declines are expected in a volatile Q3, there are signs of promise and opportunities to close deals even with constraints on due diligence and overall de-risking,” said Jurgis V. Oniunas, IMAP Chairman.

Switzerland-based Clariant has completed the sale of its masterbatch business to US-based PolyOne for $1.44bn on 1 July and is now turning its attention to the sale of pigments, while France-based Arkema completed the sale of its functional polymers business to South Korea’s SK Global Chemical for €335m on 1 June.

Arkema in April also announced a strategic review of options for its methyl methacrylate (MMA) and polymethyl methacryate (PMMA) business.

“Strategically, companies are not changing their view and the crisis is not changing their approach. Having said that, they are also not willing to take a significantly lower value for their assets because of the crisis,” said Zachariades.

On balance, the M&A market prospects for H2 2020 are bullish compared to H1 2020. However, much of this will depend on the macroeconomic conditions the world faces in late Q3 after the US and EU stimulus packages have expired and employment data etc. more accurately reflects reality.