Price and market trends: Weak outlook produces M&A targets

10 January 2014 09:47 Source:ICIS Chemical Business

A sluggish economic recovery and the threat of imports is weighing on sentiment. Non-core assets are up for sale

Europe is recovering. After years of forecasts that the region’s economy may have bottomed out, there is evidence that green shoots are slowly pushing through the compacted muck of years of economic malaise. “Slow” is the operative word, and this is a huge stumbling block for the European chemical industry’s recovery.

 Many companies are seeking to downsize in Europe

With crucial end markets such as construction and the automotive sector still in the doldrums – although better off than in mid-2013 – demand remains sluggish in many sectors.

According to industry body Cefic, European chemicals output fell by 1.1% in the first eight months of 2013 compared to 2012, which was hardly a vintage year.

The prevailing home market malaise takes place amid the industry’s eroding competitiveness internationally as a result of shale gas in the US and cheaper energy and fuel costs in every other part of the world.

Geert Dancet, head of Reach-coordinator the European Chemicals Agency (ECHA), told ICIS earlier in the year that Europe may not be able to sustain a commodity chemicals industry forever. He added that the additional cost burden placed on companies by Reach compliance may make them more competitive by forcing them to look at what parts of their business are the most essential.

While company CEOs may not be lining up to thank Dancet for this additional push towards streamlining, the shedding of non-core business has been one of the key themes in the European chemicals industry this year.

Many divestments are a result of companies falling back on core competencies and shedding less central assets.

There are also sales being driven by the weight of some sectors on company’s financials. This is an ongoing process across the continent, and is producing plenty of potential M&A targets. Question marks over the European chemical industry’s long-term competiveness, macroeconomic malaise and the fact that some businesses earmarked for sale – such as upstream vinyls business KEM ONE SAS and TiO2 producer Sachtleben – are in under-performing sectors mean that European M&A valuations are attractive compared to other regions.

“A number of chemicals firms are looking to downsize in Europe, resulting in more of a buyer’s market than there is elsewhere in the world,” said Caroline Fuller, a partner at US firm Squire Sanders.

By comparison, valuations in the Asia-Pacific region are becoming increasingly frothy as producers and investors seek to capitalise on the region’s growth rates, and gain a foothold in Asian markets. In the year to early December, Asia-Pacific’s share of global M&A deal flow was 28.8%, compared to 23.7% for traditional chemicals industry M&A market leader North America.

“Asia-Pacific is becoming an increasingly key market for buyers, especially for buyers from developed markets. There is a drive to do deals that, even if they do not have an Asia-based target, have targets with a substantial Asian foothold,” said Squire Sanders partner Darren Warburton.

Despite the attractions of Asia and the bullishness of the North American chemicals sector, the top three M&A deals in the year to December were all European targets, according to Squire Sanders.

The top deal for the period was the acquisition of Germany-based oxo-alcohols specialist Oxea by the Oman Oil Company from private equity firm Advent International, for $2.4bn.

The Chengdong Investment Corporation’s purchase of a 12.5% stake in Russian fertilizer producer Uralkali for an estimated $2bn and UK-headquartered investment firm Cinven acquiring Germany-based ceramics business Ceramtec from US-based chemicals producer Rockwood Holdings for €1.4bn were also among the top-price M&A deals during the period.

The Oxea deal was described by Sanders as a “substantial” return for Advent, which acquired the business for $634m in 2006, but a 2006-13 ownership period is a long time for private equity firms, which target exits after three to five years, and illustrates the ongoing issues for investors which acquired assets at the top of the valuation curve prior to the global economic crash.

The fact that a $2.4bn sale represents the biggest ticket purchase of the year underlines another theme of 2013. There were no megadeals of the order of Solvay’s €3.4bn acquisition of Rhodia in 2011 or Access Industries’ creation of LyondellBasell through a merger in 2007, indicating some degree of buyer caution, or fewer strong targets in play.

Anticipation of a wave of consolidation across the European chemicals industry has yet to materialise, with major players such as Solvay and INEOS hiving off low-performing businesses such as PVC into shared joint ventures instead of pursuing takeovers.

The lack of high-end deals can make the numbers for M&A seem weaker than the reality may reflect. According to Squire Sanders, M&A volume in the third quarter of 2013 was up 45% year on year with 103 deals agreed, but total value dropped by 28% year on year to $10.8bn.

The slump obscures a healthy level of large-cap – over $500m – deals agreed during the year, but the absence of megadeals is apparent.

If the European recovery does stick, it is still a long road to normal growth rates, meaning that the need for producers to increase efficiency, streamline operations and shed weight, meaning the pipeline of potential acquisition purchases is likely to remain strong through next year.

By Tom Brown