OUTLOOK ‘21: ‘All systems go’ for big bounce in global chemicals M&A

Author: Joseph Chang


NEW YORK (ICIS)--The chemicals mergers and acquisitions (M&A) market is poised for a major rebound in 2021 following a pandemic-hindered 2020 as business confidence returns and central banks keep financing markets buoyant.

“We see strategic buyers not hesitating to buy and sell, and financial sponsors flush with cash and looking for deals. The market is open and debt financing markets are very strong,” said Leland Harrs, managing director at investment bank Houlihan Lokey.

“Some deals that were put on pause will go to market in the new year. There is a much more optimistic tone than four to five months ago as people are now looking beyond Covid. All systems are go and we should be in for an active 2021,” he added.

Positive news on the vaccine front, continuing central bank policies boosting liquidity and a new US administration that could ease global trade tensions are all giving encouragement to the M&A market.

“Chemicals is the most global sector, and will benefit from both an improved political and health environment,” said Bernd Schneider, head of chemicals at investment bank Alantra.

“Many assets that had been held back by private equity sellers waiting for an improved macroeconomic picture will coincide hitting the market together with assets that have naturally reached the end of the investment cycle. Hence, we should see healthy deal flow in 2021 with most of the effects starting in the spring,” he added.

Transaction multiples have held up well during the pandemic while public valuations for chemicals companies have seen robust recoveries in anticipation of a global economic recovery post-coronavirus.

“Almost everyone we’re talking to is optimistic about 2021, which is expected to experience an elevated level of M&A activity. In fact, we’re already seeing several assets hitting the market. In addition, chemical stocks have rebounded quickly, for the most part, and that’s driving a lot of confidence among corporates,” said Alain Harfouche, managing director at investment bank Guggenheim Securities.

“2021 will see a combination of pent-up demand for divestitures and private equity looking to put money to work as many came up short of their investment goals in 2020. Leverage levels [for borrowing] are higher today than pre-pandemic,” said Telly Zachariades, managing director of Piper Sandler Chemicals and Materials.

“Even with a resurgence of the virus and potential lockdowns, people have found out how to make things work. By mid-2021, the vast majority of people in the markets where there is significant M&A activity will have been vaccinated, and the second half of 2021 should see a return to some semblance of normalcy,” he added.

Global chemicals M&A activity slowed in 2020 versus 2019, both in terms of the number of deals and value with “volume still healthy, but clearly subdued”, said Peter Young, president and managing director of investment bank Young & Partners.

Through Q3 2020, $28.3bn worth of chemicals deals closed ($37.7bn annualised) versus $47.3bn in all of 2019 and $157bn in 2018. For 2020, just one deal - the $9bn purchase of Hitachi Chemical by Showa Denko - was 32% of the total, according to Young & Partners.

In terms of number of deals, 43 transactions were completed through Q3 2020 (57 annualised) versus 81 deals closed in all of 2019, according to the investment bank.

“We feel there will be an improvement in chemical M&A volume in 2021, but not a major uplift. Strategic deals will still get done, private equity firms will sell businesses they have owned for more than four or five years, strategics will shed non-core and less attractive businesses in their portfolio and Asian companies will continue to execute a wide variety of transactions,” said Young.

“If, in addition, the pandemic situation improves sufficiently by mid-2021 and there are signs of a sustainable economic recovery, 2021 should be an improved year for chemical M&A compared to 2020, but still well below the volumes in 2018,” he added.

A number of companies have shown resilience or even benefited during the pandemic, such as those in hygiene and cleaning chemicals. Acquisition interest in these businesses is strong, noted Houlihan Lokey’s Harrs.

Private equity firm Bain Capital is seeking a sale of cleaning chemicals company Diversey for around $6bn, according to a Bloomberg report. Bain declined to comment on the report.

“Resilient businesses exposed to long-term mega trends such as those in specialty ingredients, biocides, disinfectants and filtration should see positive multiple arbitrage pre-Covid versus post-Covid of 2-3x EBITDA (earnings before interest, tax, depreciation and amortisation) expansion and in selected cases even beyond,” said Alantra’s Schneider.

On 6 December, Singapore-based Everstone Capital announced a deal to acquire India-based Calibre, a producer of specialty ingredients for the pharmaceutical, nutritional and personal care segments for an undisclosed sum. Alantra advised Everstone on the transaction.

The coatings, adhesives, sealants and elastomers (CASE) segment is also seeing attractive transaction multiples. These assets were already sought-after pre-pandemic, and continue to be in high demand, with valuations often discussed in the 10-13x EBITDA range, Schneider added.

In December, US-based Huntsman announced its $250m planned acquisition of US-based Gabriel Performance Products, a producer of specialty additives and epoxy curing agents for the coatings, adhesives, sealants and composite end-markets, from Audax Private Equity. The price represents a multiple of about 11x 2019 adjusted EBITDA, and the deal is expected to close in Q1 2021.

“There are a couple processes where the target has taken a big hit to earnings in 2020 and is trying to sell based on a more normalised level of EBITDA - that’s a challenge but not impossible. But others that have emerged unscathed or benefited during the pandemic are achieving premium multiples because of the resilience they have demonstrated,” said Piper Sandler’s Zachariades.

Flavours and fragrances (F&F), personal care ingredients, as well as paints and coatings, adhesives, water treatment, building products, surfactants and some value-added distribution assets are generally highly sought-after and command relatively high multiples, said Federico Mennella, managing director and co-head of the global chemical and materials practice at Rothschild & Co.

Rothschild & Co advised private equity firm Ardian on the sale of France-based renewable F&F firm DRT to Switzerland-based Firmenich, US-based natural cosmetics ingredients company Floratech on its recent sale to US-based Cargill, and SunOpta on the sale of organic ingredients company Tradin Organic to Amsterdam Commodities (Acomo).

“We’ve seen surprisingly good growth in M&A activity with some sectors doing amazingly well. The market has been very active globally and there is a good pipeline,” said Mennella.

While it’s expected that sectors that have performed well during the pandemic could receive strong interest from an M&A standpoint, “many businesses that have experienced a slowdown are now in recovery mode, providing potential upside for a new buyer”, said Harfouche from Guggenheim Securities.

Even as companies have pulled back on capital spending in 2020 amid uncertainty, “for an asset that’s a strong strategic fit, they will pursue it. Balance sheets are good, unlike during the financial crisis of 2008-2009”, said Harrs from Houlihan Lokey.

Recent examples in the coatings sector include US-based PPG agreeing to buy road and pavement markings company Ennis-Flint for $1.15bn, and Netherlands-based AkzoNobel’s planned acquisition of Spain-based coatings maker Titan for an undisclosed sum, he noted.

“On the acquisition front, corporates will be judicious. They are less driven by financial pressure and the availability of capital, but more by pressure from the financial community to invest wisely. Deals are not being hindered by the lack of capital,” said Harrs.

While the pandemic “initially sent a shock through the M&A market, activity has since stabilised and begun to improve, though at a lower level than previously”, said Chris Cerimele, managing director at investment bank Balmoral Advisors.

“Buyers are still a bit wary on the impact Covid is having on business models - whether companies are doing well or poorly. They are looking at things carefully because these may be temporary situations,” he added.

“Every process will likely go through scrutiny around performance through Covid - something we also saw post the Great Recession. But my view is that it should not have a severe negative impact on valuation,” said Harfouche from Guggenheim Securities.

“If you look at the roster of deals announced in the last six months, transaction multiples have been relatively healthy on an LTM (last 12 months) basis. In certain cases, there was a view that the business is being acquired at the trough,” he added.

However, unlike 2017 and 2018 when many chemicals assets were getting premium pricing, the market has become more discerning, even pre-coronavirus, said David Ruf, managing director and head of chemicals and materials at KeyBanc Capital Markets.

“The market is valuing things reasonably. A-plus assets are still getting A-plus pricing,” he noted.

One major trend is the impact of ESG (environmental, social, governance) on M&A strategies.

“As growth remains the ultimate goal, there is a push for new technologies. Many companies are considering setting up VC (venture capital) funds or making small investments in growing companies, with some tied to universities, said Rothschild & Co’s Mennella.

“Companies must look at where the growth is going to come from, and revisit this in the context of ESG and the circular economy,” he added.

In December, US-based LyondellBasell and France-based SUEZ announced the joint acquisition of Belgium-based mechanical plastics recycling company TIVACO, which will add 55,000 tonnes/year of production capacity to their Quality Circular Polymers (QCP) joint venture.

On the chemical or molecular recycling of plastics front, LyondellBasell in September 2020 started up a pilot plant in Ferrara, Italy using a technology developed with Germany’s Karlsruhe Institute of Technology (KIT).

With its goal of producing 2m tonnes/year of recycled and renewable-based polymers by 2030, further acquisitions in this space appear likely.

Where in the past growth initiatives would often mean significant capital spending (capex), today the chemical industry has to be “more nimble, open to joint ventures and tolling agreements while also considering advances in AI (artificial intelligence) and digitisation”, said Rothschild & Co’s Mennella.

“We are also seeing a move towards China first, and maybe India later, but it’s clear the centre of gravity for growth is moving towards Asia. Because of Covid-19 and the resulting supply disruptions, companies generally want to be closer to the consumer, shortening the logistics chain,” he added.

In September 2020, LyondellBasell completed its acquisition of a 50% stake in the Bora cracker and downstream polyethylene (PE) and polypropylene (PP) project in China with the goal of “producing in China, for China”, according to CEO Bob Patel.

In October, LyondellBasell also agreed to take a 50% stake in Sasol’s new Louisiana cracker and downstream PE units for $2bn. With these two opportunistic deals, the company has essentially created a “synthetic world-scale cracker” in short order with zero project execution risk.

Private equity firms are likely to be more aggressive amid the abundance of liquidity.

“From a financing perspective, the market continued to gain steam through the second half and buyers can get higher multiples of leverage,” said KeyBanc’s Ruf.

“Financial buyers are rabidly looking for acquisitions. There is so much capital chasing deals, and the amount continues to grow,” said Harrs from Houlihan Lokey.

Meanwhile, corporate carve-out activity continues at an active clip, especially among European chemical companies, keeping the M&A pipeline full, he pointed out.

France-based Arkema in December announced the sale of its polymethyl methacrylate (PMMA) business to US-based Trinseo for €1.14bn. Trinseo in turn announced it is exploring a potential divestiture of its synthetic rubber business.

Belgium-based Solvay is in the process of selling its composite process materials business to Composite One, and Switzerland-based Lonza aims to exit its specialty ingredients business.

“Carve-outs remain very compelling for private equity firms because there’s potential for value creation by being strategically focused on the asset’s core capabilities and strengthening them, as opposed to being a noncore segment of a larger enterprise with misaligned strategic priorities,” said Guggenheim Securities’ Harfouche.

The pandemic prompted companies to think more strategically about “what do I own, and what should I own? There’s been a lot of soul searching. Covid forced you to focus on what you care about”, said KeyBanc’s Ruf.

“We wound up with a year that’s gotten busier and busier towards the end, and that’s unusual. Many carve-outs were launched at the end of US election season, and there’s been some pre-marketing for processes anticipated to launch in 2021. We see a robust M&A calendar in 2021,” he added.

“In the next 18-24 months, we will continue to see an active M&A market in the chemical space. Many strategics will look to restructure their portfolios and exit noncore assets, while private equity will continue to be quite active and flexible in initiating and structuring transactions,” said Rothschild & Co’s Mennella.

“There are now a lot more private equity groups focusing on the chemicals space. They see opportunities to consolidate and set up platforms,” he added.

Private equity firms are acquiring chemicals assets from corporate carve-outs, as well as other private equity firms.

In October 2020, private equity firm Ardian acquired a 50% stake in US-based specialty additives and intermediates producer ANGUS Chemical from Golden Gate Capital at a total enterprise value of $2.25bn.

Also in October, Barentz International, a portfolio company of private equity firm Cinven, announced the acquisition of US-based chemicals distributor Maroon Group from CI Capital Partners.

“We are seeing many pre-emptive approaches. In the past, sellers would normally cast a broad net with auctions but today many processes are more tailored with either 1-on-1 talks or a selected number of parties approached,” said Mennella from Rothschild & Co.

“In many situations, sellers are looking for certainty and quick execution rather than engaging in a long process with uncertainty. Once a buyer approaches a seller on a preemptive basis, it can strike a deal by moving quickly and efficiently,” he added.

In certain ways, the pandemic has actually accelerated the M&A process as companies have learned to use more efficiently new methods enabled by technology, such as virtual data rooms and video presentations, the banker noted.

“Whereas before you may have had typically only 10-15 people from a buyer participate in any one management presentation, now you can get 70-90 or more people on a video call, and so the presentation gets socialised within a company more effectively. This can move the process more quickly,” said Mennella.

2021 could also see some publicly traded chemical companies being taken private in leveraged buyouts (LBOs). Activist investors are returning to the sector, with recent targets including WR Grace, GCP Applied Technologies, Arkema and Olin.

“Although many chemicals stocks have recovered to pre-Covid levels, there are still some that present short-term opportunities and we will likely see a few more take-privates in 2021,” said Piper Sandler’s Zachariades.

Activist investors often push for the sale of certain businesses or the entire company, driving M&A activity in many cases. Other companies may proactively take steps to divest noncore assets or accelerate these plans to ward off activist investors.

“In order to ward off these unwelcome approaches, many public companies retain bankers and lawyers to do an audit of their activist defence checklist, identifying what an activist could be looking for and addressing it before it is too late,” said Mennella from Rothschild & Co.

The fact that large diversified chemical companies have generally lagged their counterparts in commodity and specialty chemicals in stock performance has opened the door for more activism.

“The one sector that has lagged is diversifieds. We’re seeing situations where diversified companies with an attractive portfolio of IP (intellectual property) and technologies are not garnering the right multiple, and that’s partly driving an increase in activism and carve-out activity,” said Harfouche from Guggenheim Securities.

The number of diversified chemicals companies in the US has been shrinking, evidenced by the wave of spinoffs in years past - Chemours from DuPont, Venator from Huntsman, Corteva from Dow/DuPont and ChampionX from Ecolab being some examples, he noted.

“That shift to pure play is more evolved in the US versus Europe, and eventually we’ll see that in Asia as well,” said Harfouche.

Sectors ripe for consolidation include resins, oilfield chemicals and lubricants/additives.

“We do see consolidation accelerating with Covid. In the resins space, we see an increasing shift of conglomerates away from this area as they focus more on nutrition and health,” said Alantra’s Schneider.

In late September, Netherlands-based DSM agreed to sell its resins and functional materials businesses to Germany-based Covestro for €1.6bn as it continues its evolution into a nutrition, health and sustainable living company. The acquisition will broaden Covestro’s portfolio of sustainable coatings resins.

“Consolidation will also happen in oil and gas chemicals. From 2010-2016, many players paid up to benefit from the US shale gas boom. But now the long-term outlook has changed and many companies view this as a noncore asset,” said Schneider.

Chemical companies that have acquired oilfield chemicals businesses in the past several years include Solvay (Chemlogics, 2013), Kemira (Polymer Services, 2015; 3F Chimica, 2013; Albemarle’s Teesport assets, 2010), and Clariant (Kel-Tech and X-Chem, 2016).

Lubricant additives is another sector that could see consolidation, especially with the shift towards electric vehicles (EVs) and away from the internal combustion engine, said the Alantra banker.

“These sectors and others such as pigments and composites are in the spotlight of private equity consolidators,” said Schneider.

While a number of companies have suffered through the pandemic, there has not yet been a wave of distressed asset sales or processes.

“We are having more conversations on distressed situations versus three months ago but it’s not a wave yet. Lenders are not putting a ton of pressure on companies to sell just because of covenant defaults and are generally working with them,” said Cerimele of Balmoral Advisors.

In the US, much of this is being driven by government policy where the Treasury Department is easing pressure on banks in terms of underperforming loans, he noted.

“On the M&A side, it’s important to remember that buyers are well aware that the pandemic has wreaked havoc on many businesses, and are putting greater scrutiny on a company’s performance, competitive positioning and business model. Others are simply looking to take advantage of companies in distress,” said Cerimele.

“It’s more important than ever to establish a competitive process involving multiple buyers. This not only ensures that a deal has the best chance of being completed, but also that a company is sold at the best possible price and terms,” he added.

Global specialty chemicals transaction multiples have actually increased in 2020, partly as a function of a strong financing market and partly because earnings have declined in some cases, said Allan Benton, vice chairman at investment bank Scott-Macon.

Year-to-date through November 2020, the median TEV (total enterprise value)/EBITDA multiple for specialty chemicals deals was 16.3x based on 26 closed transactions for which data was available, up from 10.9x in 2019 and 12.2x in 2018, he noted.

On the commodity chemicals side, the median TEV/EBITDA multiple for 24 closed transactions was 9.1x year-to-date through November 2020 versus 8.4x in 2019 and 9.6x in 2018.

“We continue to see a good level of activity with valuations holding up in a difficult environment, which is very encouraging,” said Benton.

“For 2021, companies expect their businesses will pick up, so the multiples may not be as high but the total value might be better. It should be a better time to negotiate due to less expected uncertainty. This will also make it easier for private equity firms to compete with strategics,” he added.

By Joseph Chang

Thumbnail image shows money. Photo by Olena Serzhanova