OUTLOOK ’22: Omicron surge dampens Europe investor confidence but chems M&A to continue
LONDON (ICIS)–Portfolio optimisation, private equity interest, and the intensifying pressure of sustainability targets are likely to continue to drive the chemicals mergers and acquisitions (M&A) market, despite the battering that investor confidence took in late 2021 when the Omicron COVID-19 variant emerged.
Despite the chronic and intense issues seen in global supply chains and inflation rising to the highest levels since the 2008 financial crisis in Europe, market confidence had been growing steadily since late 2020.
The demand resurgence seen by chemicals producers in the second half of last year continued through much of 2021, buoyed by industrial output growth rising at the fastest pace in decades in the wake of easing lockdown measures.
With vaccination campaigns – at least in the western world – progressing at a brisk pace through the year, a perception was gradually coalescing for investors and policymakers that a corner had been turned in the pandemic, and that the kind of radically disruptive measures like lockdowns and travel bans would no longer be necessary.
The discovery of the Omicron variant and the wildfire pace that it has spread through even thoroughly vaccinated populations had a massive impact on the global economy by the end of 2021.
Players are gingerly dusting themselves off, with economists and central bankers already moving to characterise the impact as transitory, while warning of a bleak early 2022.
“Returning to our crystal ball in early December 2021, I have a strong deja vu feeling from last year when we were looking at a still fairly bleak future,” said Carsten Brzeski, analyst at ING Germany.
The unpredictability of coronavirus waves and the frighteningly brief time it takes a new surge to dominate a population make gauging the future difficult, but this has proven far less of a dampener on acquisitions and divestments than initially feared.
Acquisitions are based on extremely granular analyses of likely future earnings, with an over-generous purchase price potentially making it impossible for an asset to recoup the cost of buying it in the first place.
With the pandemic reducing some key chemicals end markets such as the automotive sector to demand levels last seen in the 1940s and the direction of travel for future purchasing difficult to map, valuing businesses has never been more difficult.
This led to some early freezes to sales processes earlier in the pandemic, with Clariant putting the divestment of its pigments business on hold in April 2020, but the hit to dealflow in general proved not to be as dire as players had feared.
While the M&A pipeline for 2020 was narrower than the previous year, double-digit numbers of deals with price tags in excess of $200m were agreed that year.
The deals that were agreed largely skewed smaller than the previous year, which saw major divestments such as BASF’s pigments business and Huntsman’s chemicals intermediates arm.
But some big-ticket, high-multiple agreements crossed the finishing line, such as Covestro’s purchase of DSM’s resins and functional materials business, and PPG’s outright purchase of Finnish coatings major Tikkurila.
Mid- to large-cap deal volumes this year remained relatively slim compared to before the pandemic, reflecting the heightened selectiveness of prospective buyers, but the number of sales agrees over the $1bn mark skyrocketed, potentially illustrating greater comfort with the chaos of this new era.
The drive towards less cyclic, higher-margin portfolios continued to drive the market, with French producer Arkema concluding the sale of its polymethyl methacrylate (PMMA) business to Trinseo and agreeing the purchase of Ashland’s specialty adhesives business.
More temperate waters for larger deals also led Clariant to revive and conclude its pigments business sale to SK Capital and Heubach Group in mid-2021.
Private equity firms have become over the last decade more sanguine about holding companies longer than the three-year tenures that had been more common before the financial crisis, but the revival of the market was sufficient that huge prices could be paid for the right target only a couple of years after purchase.
This was the case with Lone Star’s €3.17bn purchase of BASF’s construction chemicals business, which was snapped up after less than two years by Sika for the equivalent of €5.3bn, further cementing the Swiss player’s position as one of the world’s leading operators in the space.
Sustainability, circularity and carbon-reduction are also a huge driver of both acquisition and divestment, with firms paying big to expand into areas such as battery technology and hydrogen.
The subject has dominated the agenda at industry summits such as EPCA for years now, and sustainability is becoming an increasingly significant factor in investor decision-making, with a company’s planned journey to sustainability now a key lens for buyers.
“It’s more about a company’s path to carbon neutrality and how much you need to invest which is not returning capex [capital expenditure],” said Martin Bastian, head of chemicals at investment bank Houlihan Lokey.
“You cannot do an M&A process now without touching on this point where before you had a one-pager in there,” he added.
This focus on transition means that investors are as focused on exposure as growth opportunities, with carbon-heavy assets where emissions will prove difficult and costly to abate.
Solvay announced plans in March to place the soda ash operations that were the original foundation of the business into a separate legal entity to “increase future strategic flexibility”, the company said.
Future strategic flexibility was also cited by BASF as the reason for carving out its mobile emissions catalysts business, announced in December.
Such moves hint at potential for large strategic sales ahead as companies continue to remap their operations in the face of new pressures and the changed landscape of the pandemic.
Public markets have been slower to recover their attractiveness as an exit route, due to the difficulty to plan for impact of the pandemic on investor appetite.
Company executives could announce plans to take spin out an asset via initial public offering (IPO) or go public when conditions seem stable, but a surge in infection numbers between the announcement and the launch date could stand to wreak havoc on share price targets.
The impact of the pandemic on oil pricing and demand saw BASF announce in mid-2021 that the float of its oil and gas Wintershall Dea joint venture subsidiary will now take place at an indeterminate point post-2021, after several previous delays.
A couple of other players, mostly private equity-owned, have been intrepid enough to move forward with listings.
Azelis completed a listing in September, with EQT remaining as majority shareholder, although shares have been trading slightly below the high of €32.48 since October.
Nouryon, which was purchased by Carlyle from AkzoNobel in 2018, is also currently preparing to list.
THE VIEW AHEAD
The current resurgence has undeniably taken the wind out of investors’ sails.
The shift in western policy footing towards booster doses of vaccines has only reduced the focus on increasing supplies to developing countries, leaving the virus free to continue to incubate and change.
“A big question is working capital, and what is the new normalised level of working capital? So the historical analyses you’ve done in the last 12 months don’t hold because there’s so many different influences,” Bastian said.
“So there’s a big, big area where you can have long discussions around what’s the right level, but there’s no true there’s no right or wrong answer because nobody has a perfect crystal ball. at some point, you just have to accept that there’s more volatility in the chain,” he added.
The implication that the lockdown era is no longer behind us, and that significant disruptions to demand patterns could be set to continue further into the future, means that it remains incredibly difficult to gauge the landscape more than a few months ahead, if that.
But, just as governments seem to have shifted towards more finely-tuned responses to infection surges, and vaccination campaigns blunt the impact on hospitalisations, markets have become more relaxed about dealing with those flashpoints.
The flow of sales and purchases looks to continue at least steady from the last couple of years into 2022.
“When you look at COVID adjustments in M&A processes or performance adjustments, some of it was clear when there was a factory out for a month or two months because of the lockdown. You could adjust your earnings for this because this is only a delay of demand, rather than cancellation of demand,” Bastian said.
“You have to differentiate between end customer industries shifting because of the pandemic, or some of them going out of business,” he added.
Focus article by Tom Brown.
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