Chem M&A market starts thawing after Covid-19 freeze – banker

NEW YORK (ICIS)–Merger and acquisition (M&A) activity in the chemicals sector is starting to thaw after many processes were put on hold amid the Covid-19 crisis, an investment banker said.

“The M&A market is mirroring society as it reopens. We’re seeing new inquiries for transactions. So things are thawing – there are no floodgates opening yet,” said Chris Cerimele, managing partner at investment bank Balmoral Advisors, on a webinar.

“We need more confidence on what 2021 and 2022 is going to look like. Even if [earnings are] lower, if you’re pretty confident in the level, it’s easier [to do deals and] for lenders to provide credit,” he added.

Initially when the Covid-19 crisis began, some companies on the sell-side wanted to keep processes going, but by early April it was clear that this was going to be something very different, the banker recalled.

“Then there was the economic impact where you started to see it in the numbers. This created uncertainty and then there was a domino effect,” said Cerimele.

“Buyers started to wonder – why are these assets still on the market? For a seller, you don’t want to be in a position where buyers are [thinking you really need to sell],” he added.

And even corporate buyers with strong balance sheets were not looking to use them for acquisitions but were focused on preserving cash for liquidity needs, the banker said.

Meanwhile, both lenders and private equity firms focused on stabilising their own portfolios – of loans and businesses, respectively, he noted.

“Now we’re sensing more confidence by private equity since they’ve stabilised their portfolios,” said Cerimele.

REDUCING LEVERAGE FOR DEALS

However, the financing market is still challenging, making it more difficult for private equity firms to employ the level of leverage they’ve used in the past. This should help bring down valuations, said the banker.

“In the lending market, we’re hearing that at least for the foreseeable future, they’re reducing leverage for new loans. The days of 6x EBITDA [earnings before interest, tax, depreciation and amortisation] in financing are gone for awhile,” said Cerimele.

“Financing for mid-size and lower-to-mid-size deals is capping out at around 3.5x. So if leverage is an important factor as it is for private equity, it may influence the price you’re willing to pay,” he added.

While there are fewer data points from fewer deals and disclosed prices, valuation multiples have probably fallen 1-2 turns (multiples of EBITDA), the banker estimated.

In some cases, deal multiples may stay the same, but off of a lower earnings base, leading to a lower overall price, he added.

DISTRESSED ASSETS IN Q3, Q4, IF AT ALL

With the collapse in business activity and earnings amid the Covid-19 crisis, it would be natural to expect a flood of distressed assets hitting the M&A market.

However, government stimulus programmes involving low-cost loans or grants, along with lenders working with companies and even pushing out forbearances for 90 days, have essentially removed the urgency for fire sales, he noted.

“If the distressed opportunities are coming, it will be in Q3 and Q4. Many banks are increasing their restructuring groups, which is a leading indicator,” said Cerimele.

“Also, June financial results and covenant tests will separate the wheat from the chaff and we’ll see which companies are faring better,” he added.

Focus article by Joseph Chang

Thumbnail photo by Al Greenwood