INTERVIEW: Cross-border chemicals M&A to become more prevalent - banker

Author: Joseph Chang

2021/07/06

NEW YORK (ICIS)--Cross-border mergers and acquisitions (M&A) will become more prevalent as companies seek to localise supply chains and boost their presence in fast-growing economies, including the US, an investment banker said on Tuesday.

“We continue to see growth in cross-border M&A, and we notice a growing percentage of transactions involving Asian players,” said Federico Mennella, managing director and co-head of the global chemical and materials practice at Rothschild & Co.

“In the long term, Asia is becoming a more relevant player in the chemical space and already we are seeing Asian companies in M&A processes that we haven’t seen in the past,” he added.

Whereas Asia-based buyers typically have come from Japan or South Korea, today there are potential buyers from China, India, Thailand and Malaysia, as well as the Middle East. Already, Asia accounts for about 30% of chemicals M&A by value and even more by volume, the banker pointed out.

Thailand-based Indorama in mid-June closed on its acquisition of US-based CarbonLite’s recycled polyethylene terephthalate (PET) plant in Dallas, Texas for $63.8m.

Indorama is also in exclusive talks to buy Brazil-based surfactants producer Oxiteno, which has production facilities in Brazil, the US and Mexico. If successful, this would build on its $2.0bn acquisition of Huntsman’s surfactants and intermediates business in January 2020.

Asia is also still an attractive market for US and European buyers seeking to enlarge their footprint in faster growing regions without having to export long distances.

On 30 June, US-based LyondellBasell announced the acquisition of Malaysia-based PolyPacific Polymers, a polyolefins compounder with 25,000 tonnes/year of capacity.

The new focus on M&A among Asia and Middle East buyers is also part of the maturation process of companies in emerging markets.

“In the past, many Asia and Middle East-based companies were focused on building their own plants. Now M&A is part of their toolbox,” said Mennella.

These companies are also being more flexible in their approach, working in partnership or taking minority stakes in companies, such as what Saudi Arabia-based SABIC, now part of Aramco, has done with Switzerland-based Clariant.

In March 2020, SABIC upped its stake in Clariant from nearly 25%, to 31.5% stake, just below the one-third threshold above which the investor must make a takeover offer under Swiss law.

An example on the private equity side is Japan-based Mitsubishi Corp which has long been a strategic partner and the largest original investor in One Rock Capital Partners, noted the banker.

One Rock has been very active in the chemicals space. In June 2021, it agreed to buy Eastman Chemical’s rubber additives business for $800m. In February 2020, One Rock acquired US-based specialty chemicals company Innophos Holdings for $932m. In March 2019, it bought Nexeo Solutions’ plastics distribution business for $640m.

“One Rock benefits from its relationship with Mitsubishi, which provides industry knowledge and contacts for the private equity group when needed. It’s a symbiotic model,” said Mennella.

PRIVATE EQUITY ACTIVE AND FLEXIBLE

More flexible deal structures are also appearing in private equity, he noted, citing European private equity firm Ardian’s acquisition of a 50% stake in ANGUS Chemical in October 2020 from US-based Golden Gate Capital, which is retaining a 50% stake and the Swfr4.2bn ($4.6bn) acquisition of Lonza’s Specialty Ingredients business by Bain Capital and Cinven.

Private equity firms Black Diamond and InvestIndustrial also had such a partnership in their joint ownership of UK-based specialty chemicals company Polynt-Reichhold. On 2 July Black Diamond announced it will buy out InvestIndustrial’s stake and refinance existing debt at the company through a €1.3bn debt issuance.

Private equity’s success in chemicals deals has attracted many new players into the field.

“Ten years ago there were far fewer specialised private equity groups in chemicals. Now there are a lot, including European groups coming into the US market,” said Mennella.

Private equity firms are also putting chemicals assets on the market in the earlier stages of their holding period of 5-7 years to take advantage of strong earnings and healthy credit markets. Plus, firms seeking to raise new capital have decided to monetise some investments to establish or boost track records, he pointed out.

NEW MANAGEMENTS DRIVE M&A

“A lot of assets are coming to market from private equity, and at the same time, many strategics are taking advantage of the strong credit and equity markets to be very active in the M&A space. A great predictor of M&A activity is the appointment of a new CEO, who takes a fresh look at a company’s strategy, especially if they aren’t hired from within,” said Mennella.

US-based Ashland is seeking a sale of its performance adhesives business under CEO Guillermo Novo, who joined the board in May 2019 from Versum Materials and became CEO at the end of 2019.

US-based Trinseo under CEO Frank Bozich who joined the company in March 2019 from SI Group, is making multiple moves.

On 21 May, the company agreed to sell its synthetic rubber business based in Germany to Poland-based Synthos for around $491m. On 3 May, it completed the acquisition of France-based Arkema’s polymethyl methacrylate (PMMA) business for €1.137bn.

INDUSTRIAL INFRASTRUCTURE OPPORTUNITY

There may also be further opportunities for major chemicals companies to sell off infrastructure assets, as US-based Dow has done with its railroads, terminals and ports, said the Rothschild & Co banker.

On 1 July, Canada-based NOVA Chemicals announced the sale of its ethylene storage and trading business to US-based midstream company Enterprise Products Partners, allowing it to focus on its core business of ethylene and polyethylene (PE) production.

“We still think there’s an opportunity for the separation of hard assets that are best owned by infrastructure funds and other specialists in this area,” said Mennella.

Interview article by Joseph Chang

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