Right assets worth the price for Arkema as adhesives valuations rise – CEO

LONDON (ICIS)–Acquiring the right assets for Arkema’s portfolio to grow its adhesives business is still the right choice despite growing interest in the sector starting to push up valuations, according to the CEO of the France-based chemicals producer.

Since acquiring Bostik from Arkema’s former parent company Total in early 2015, the company has worked on growing adhesives as a pillar of its operations, with the goal of increasing the proportion of group sales from the sector to at least a third.

Accounting for 22% of company revenues in 2018, the company has pursued a raft of bolt-on purchases in the sector, from smaller players such as CMP Specialty Products for relatively modest sums to larger entities such as Den Braven for €385m.

A highly fragmented sector with many smaller players, the adhesives sector has not been as marked by inflated valuations as larger chemicals producers, but increasing interest in the sector has started to drive up prices, according to Arkema’s CEO Thierry Le Henaff (pictured).

“Valuations have been a little bit higher in the last two years for nice specialty chemicals [opportunities], not only additives,” he said, speaking on the sidelines of an Arkema press conference in Paris this week.

“Access to money is cheaper also, so one is linked to the other.”

The higher prices remain worth paying for the right asset to develop the portfolio, he added.

“We try to stay reasonable in terms of multiples, we don’t want to participate to the over-rating, but we are also of the belief that if you have [a] good quality [asset], you pay the right price in order to reinforce the portfolio of the company,” Le Henaff said.

“We try to be very selective, this is why we have more bolt-ons than big movements.”

The increasing competition in the space also represents a validation of Arkema’s decision to aggressively build its exposure to adhesives, according to Le Henaff.

“[It] means our strategy to go into adhesives was a good one,” he said. “At that time, people were not sure but now you see everybody following our strategy.”

The company currently has a war chest of €1bn-1.5bn for acquisitions over the next two to three years, to be concentrated on adhesives and advanced materials purchases, with potential investments in a single acquisition up to Den Braven prices on the table for the right asset.

Net debt currently stands at 0.7 times EBITDA.

The company posted record full-year earnings before interest, taxes, depreciation and amortisation (EBITDA) of €1.47bn in 2018 on the back of strong specialties demand and firm pricing for intermediates, particularly for thiochemicals and along the methacrylates value chain.

Over the last half decade the company has aggressively focused on increasing its specialty chemicals footprint and moving away from basic chemicals with measures such as the sale of its caustic soda and chlorvinyls assets, a deal that resulted in a lawsuit from acquirer the Klesch Group, claiming Arkema misrepresented the earnings potential of the business.

Klesch’s suit was dismissed by the International Court of Arbitration in late 2015, and the bets Arkema have taken have paid off resoundingly so far, with 12% average annual EBITDA growth between 2015 and 2018, although this has not fully shown up in the company’s stock market performance, according to Le Henaff.

“The market has not recognised the incredible performance,” he said.

This could be in part due to lack of any significant share buyback programmes despite a strong balance sheet, according to Credit Suisse.

Analysts at the investment bank noted that Arkema’s high performance materials division – which includes adhesives and the company intends to grow to two thirds of its revenues over time – has a similar profile in terms of pricing tailwinds to coatings major AkzoNobel.

“The key difference we can see between the two represents the lack of buyback at Arkema. This is despite an extremely robust balance sheet and a moderating capex [capital expenditure] profile,” Credit Suisse said in an investor note on Thursday.

“Arkema’s high performance materials business has raw pricing power throughout a deflationary environment. This has been evidenced by [around 4%] price increases in Q4 [2018], whilst the raw material headwind turns into a tailwind in 2019,” it added.

The company’s multi-year EBITDA growth average is expected to slide in 2019, with Arkema guiding that earnings will be stable year on year, as deflationary pricing for some intermediates continues, expected to be offset by firming specialties margins.

“Raw materials [pricing for specialties] should at least stabilise if not starting to decrease a little bit, with pricing continuing to go up we should recover at least a significant percent of what we have lost in terms of margin,” Le Henaff said.

The company currently derives around 70% of its revenues from specialty chemicals and 30% from intermediates.

Le Henaff has stressed the importance of retaining some intermediates operations, but the company is looking to grow specialties earnings to at least 80% by 2023.

With the current level of dry powder for acquisitions, Arkema could hit that target earlier, depending on availability of opportunities, according to Le Henaff, with the company also eyeing opportunities in the advanced materials and additives sectors.

The key issue for 2019 is geopolitical stability, both in terms of Brexit and the US-China trade war, the CEO said.

While Arkema has felt little direct impact from retaliatory sanctions between the two superpowers, the overall impact on sentiment and economic growth in general is likely to remain a challenge this year, he added.

“The two big questions about the world [are] the US and China,” he said.

“Europe will be never fantastic but will be never a big crisis … so Europe will stay Europe. I still believe China will stay the engine of the world for many years, and the US in terms of competitiveness is quite an attractive region.

“If these two this year show some stability and robustness, the Earth should be in good shape, but it’s clear that there are more questions,” he concluded.

Picture source: Arkema

Interview article by Tom Brown