Global chemical industry poised for M&A boost from Japan, India in 2024 – DC Advisory

NEW YORK (ICIS)–The global chemical sector should see increasing mergers and acquisitions (M&A) activity through the rest of 2024 following a depressed 2023, driven in part by portfolio restructuring among Japanese companies as well as increasing interest by Indian buyers, according to an investment bank.

“In 2024, we are seeing increased levels of M&A activity as companies reevaluate their portfolios and seek strategic opportunities to drive growth, while navigating a constantly evolving landscape that is currently marked by technological advancements, shifting geopolitical alliances and an increasing emphasis on sustainability,” said investment bank DC Advisory in a report by managing director Federico Mennella and others.

It expects the portfolio re-evaluation of Japanese chemical companies to accelerate and spur future M&A activity.

China’s aggressive capacity expansion in commodity chemicals has greatly pressured Japanese companies exporting petrochemicals to China. Just under a third of Japan’s petrochemical output is exported, and China accounted for around half of exports in 2022, the investment bank pointed out.

“Japanese production of ethylene has dropped to its lowest in 25 years due to China’s fast-growing capacity,” said DC Advisory.

“As a result, Japanese diversified chemical companies such as Mitsubishi Chemical, Mitsui Chemicals and Resonac Holdings have recently announced strategies to restructure their petrochemical businesses, such as divesting, collaborating with other companies and to consider IPOs,” it added.

Japanese chemical companies have also become more active on the buy side as they transition towards specialty, low-carbon and more sustainable business models.

In April 2024, Japan-based Shin-Etsu Chemical announced its planned acquisition of Japan-based semiconductor materials company Mimasu Semiconductor Industry through a tender offer for shares. Shin-Etsu already had a 43.87% stake in Mimasu.

In October 2023, Sumitomo Bakelite agreed to buy Asahi Kasei’s Pax packaging and films business serving the pharmaceutical, industrial and food sectors.

DC Advisory advised Shin-Etsu and Sumitomo Bakelite on their respective transactions.

Other recent deals involving Japan-based buyers include Sumitomo Corp/Saconix, DIC/PCAS Canada and Fujifilm/Entegris’ electronic chemicals business.

INDIA AS A BUY-SIDE FORCE
Meanwhile, India’s chemical industry has grown sales by over 6%/year on average since 2012 and is now further benefiting from global supply chain diversification, the investment bank pointed out.

“We… believe the China Plus One Strategy, set up to minimize supply chain dependencies on China by diversifying the countries they source from, will drive growth in the Indian chemicals industry and prompt further M&A in the sector,” said DC Advisory.

“With the Indian public markets recently valuing the specialty chemicals sector at a lifetime peak, we expect Indian companies in the sector will be eager to utilize available cash and if required raise further equity to do global acquisitions,” it added.

The investment bank sees Indian buyers as consolidators for global assets in agrochemicals, active pharmaceutical ingredients (APIs), and specialty chemicals CDMO (contract development and manufacturing organization) segments.

In November 2023, India-based carbon black producer PCBL Ltd announced the acquisition of India-based water treatment and oil and gas chemicals company Aquapharm Chemicals for $456 million.

In June 2023, Bain Capital announced the acquisition of India-based Porus Labs, a producer of ag and specialty chemicals.

“Large global funds such as CVC through its investment in Sajjan (2021) and Bain with its investment in Porus Labs, both leading Indian chemicals manufacturers, have created specialty chemicals platforms with an Indian company as the anchor asset from which they can acquire global businesses,” said DC Advisory.

OTHER POSITIVE DRIVERS
The overall backdrop is also becoming more positive for chemical deal-making with increased earnings visibility in the sector for 2024; streamlining of portfolios toward growth subsectors; continued consolidation in sectors such as adhesives, coatings, pigments, ag chemicals and flavors and fragrances; and continued interest by private equity buyers, particularly in the sustainability aspect of chemicals, DC Advisory pointed out.

The energy transition and the circular economy are also driving chemical sector growth and M&A activity.

“We believe chemicals and materials companies that do not incorporate sustainability into their business models will not find buyers and may even struggle to survive, while those driving the change to a cleaner future will be in high demand from both private equity and strategic buyers,” said DC Advisory.

Focus article by Joseph Chang