OUTLOOK ’21: Chems M&A valuations hold up but companies look for smaller ops

LONDON (ICIS)–The value of chemicals acquisitions have remained resilient through 2020 despite the economic collapse and the opacity of future demand, but players are tending to look towards smaller acquisitions as opposed to the megadeals seen in the last half-decade.

When European governments started to lock down their populations at the end of the first quarter, there was some expectation that the mergers and acquisitions market in the sector may be largely closed, save for some fire sales, as companies looked to weather the storm and cut spending.

Deal flow in the sector was substantially weaker than in 2019, but the drop was far less significant than might have been expected in the earlier days of the crisis, as firms continued to focus on consolidating business lines and seizing opportunities.

Some unexpected deals, such as INEOS’ purchase of a big chunk of BP’s petrochemicals operations, were driven by a pro-active approach.

“M&A activity has come down for obvious reasons, but I think in chemicals overall it has continued at a healthy pace for healthier companies, with just a few distressed sales processes,” said Martin Bastian, head of chemicals at investment bank Houlihan Lokey.

“Parties have been engaging sellers with pro-active appeals, situations where you have to entice the party that wants to sell, then initiate a quasi-exclusive/bilateral type of process,” he added.

STIMULUS SPENDING LIMITS FIRE SALES
Price tags also proved surprisingly resilient, with few distressed sales, other than LyondellBasell’s bargain purchase of 50% of Sasol’s Louisiana base chemicals assets.

The price tag was $2bn, a third below LyondellBasell’s own estimates of its share of the replacement cost of those assets, as Sasol CEO Fleetwood Grobler sought to right the ship after spending hit a peak around the onset of the oil price crash and coronavirus-driven recession.

Other than such extreme cases, the availability of central bank money and stimulus funding as governments seek to stabilise their economies has kept the wolf from the door for many firms that analysts feared would be left exposed by the downturn.

The reckoning may come when that money dries up, according to Bastian.

“You don’t see many companies who have had to “hand over the keys”, there is so much cash floating around, so many government subsidies and programs, so companies are kept afloat for the time being. I think some of these processes will end and then you will see how long companies who don’t have those resources anymore recover,” he said.

SECTOR RESILIENCE
Valuations have also been buoyed by the resilience of the sector during the downturn. The lows of the first and second quarter were unprecedented but not as extreme as some firms initially signalled the lows could be.

Demand has been strong enough for players such as BASF and Covestro to significantly increase their full-year earnings expectations and the eurozone chemicals surplus for the year to October has increased as those of other industrial sectors have plummeted.

“People are getting braver for one time opportunities, but overall at present firms are much more comfortable doing $200-500m, maybe up to $1bn, transactions,” Bastian said.

PRICING
Some approaches have been opportunistic, with Elementis rebuffing three takeover offers from Minerals Technologies, stating that even the top price offered of 130 pence per share was substantially below the 179 pence company stock had traded at as of the end of 2019.

In other cases, the overall stability of the sector has led to some deals that resemble standard M&A deals that could have happened any year. PPG announced plans to acquire Finland’s Tikkurila for €25 per share, a substantial premium not just to the company’s pandemic-era share price but to its market performance in the last half- decade.

“It is a fair deal, which reflects the scarcity value of coatings assets. This is clearly a seller’s market, where the current owners have to ask themselves whether they can create such values on a standalone/going concern basis,” Bastian said.

One deal that raised eyebrows at the price paid was Covestro’s acquisition of DSM’s functional resins business.

The multiple the company gave was for the businesses’ projected 2021 earnings and the synergies the Germany-based player expects to derive from the merger of those operations with its coatings, adhesives and solvents business, but analysts estimated the value at 12 times 2020 EBITDA.

The purchase significantly expands the CAS business and was on CFO Thomas Toepfer’s wish list of purchases, according to a company spokesperson, but another advantage of the deal for both parties was potential to increase share multiples, according to Andreas Gocke, global chemicals lead at Boston Consulting Group..

“You could imagine that Covestro is looking for a deal which is not decretive to the multiple. They have a rather lower multiple, and through the DSM resins deal they get into a multiple range which is slightly above the typical commodity chemical ones, so that’s accretive to their multiple,” he said.

“In that sense it was a win-win situation because DSM is getting into higher multiple ranges because they are now even more treated like a science company, while Covestro is going also up because they had a commodity multiple up until now, and now could get a partial specialty multiple,” he added.

FUTURE VALUE
A key factor in the widespread expectation of lower valuations is the difficulty in judging future prospects amid the current volatility.

These difficulties make the exactitude with which firms try to project and price future earnings of potential acquisitions much more of a moving target, but there remains some capacity to make some assessment of future profitability, depending in sector.

“People are engaging in discussions where EBITDA is adjusted for specific corona effects if you can identify and then debate what a normalised level would be. With automotive revenues, if you’re projecting levels returning to normal next year then that is probably not credible, but over 2-3 years, that sounds more feasible,” Bastian said.

“The valuation can also go the other way, if you look at the disinfectants sector, which is certainly over performing right now, you have to try and conceptualise what the world after 2020 looks like for disinfectants,” he added.

Hold periods may prove longer for assets acquired during the pre-crisis period he added.

“For certain you will have to be more patient when it comes to holding periods, not just a three to four year window, seeing companies trying to get assets on the market faster; but if you take a more cyclical play like the Evonik MMA business you have to be a bit more flexible, whether you’re taking a three, five or even seven year holding period,” he said.

PIPELINE
The pipeline for potential deals is strengthening, according to market sources, but the way ahead remains choppy, exemplified by a reversal in fourth-quarter eurozone GDP projections by several major state trackers from 2.2% growth to a 2.7% contraction.

Deal appetite is expected to continue to strengthen as time goes on, although prospects for businesses with exposure to depressed end markets get a fair price, or whether public markets reopen more substantially, remains to be seen.

“Take the Clariant pigment business in the market right now, which has paints exposure, automotives exposure, that will be an interesting test to see where interest and valuation levels are,” Bastian said.

The drive away from conglomerates towards more focused businesses is expected to continue apace.

“There is a true value in focus,” said Gocke. “This year the delta between multi specialties and focused specialties is not so high as we used to have, but there was always in previous years an advantage in focused specialties across the board, and we are convinced that you need to be focused.”

Focus article by Tom Brown

Front page image source: Shutterstock