Commentary: Chemicals M&A surges

02 May 2014 10:06 Source:ICIS Chemical Business

An upturn in the global economy, feedstock and energy trends, strong balance sheets and cheap finance are all driving a resurgence in chemicals mergers and acquisitions

After several years of lacklustre activity in global chemical mergers and acquisitions (M&A), improved confidence in the wider macro-economic situation and new pressures caused by phenomena such as US shale gas appear to be boosting the market.

With this improved environment, the time is right for the launch the ICIS Top M&A listing. This new piece of analysis breaks down the sector’s major deals in 2013 by close date, price paid and sales of the target asset. Based on 2013 data, the largest deal for our list was US Ecolab’s $2.30bn acquisition of oilfield chemicals and services group Champion Technologies. The third largest deal was Belgian Solvay’s $1.34bn purchase of US Chemlogics, which also specialises in oilfield chemicals and services.

 M&A activity is increasing this year

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This highlights the impact of US shale oil and gas developments on M&A, a trend which is likely to continue for years to come. Europe-focused companies are trying to grab a piece of the shale gas action through acquisitions: another example from the list being Brenntag’s $42m acquisition of US oil and gas lubricants and chemicals business, Lubrication Services (LSi).

Some European companies are also using M&A to reduce their exposure to the region’s high feedstock and energy costs compared with the US and Middle East, driven by cheap gas in those regions plus EU energy taxes. This year Solvay is trying to close a deal with INEOS to merge their chlor alkali divisions. The EU is due to make a decision on this later in May. To have any hope of competing on the global market, energy intensive sectors such as this in Europe are using M&A to create businesses with the scale and cost base to compete with cost-advantaged regions.

To combat the impact of high energy and feedstock costs, European groups are also trying to move from commodities into more service-driven or value-added products. Examples of this from the list include BASF’s acquisitions of US enzyme group Verenium and German superconductor technology company, Deutsche Nanoschicht.

The ongoing trend for M&A to help US and European groups tap into emerging market growth is also evident in the list. Some good examples include German ­Brenntag’s acquisition of Indian distributor Zytex Group and Swiss Clariant’s purchase of China-­headquartered ­organic pigments company Jiangsu Multicolor Fine Chemical.

According to specialist investment bank, The Valence Group, M&A activity is likely to hit a three year high in 2014 and could soon surpass the 2007 peak. Apart from shale gas and the drive to boost revenues in low-growth environments, Valence highlights strong and increasingly healthy balance sheets, a plentiful supply of low-cost debt, activist investors and highly competitive private equity.

Valence believes that with increasing levels of activity, valuations will remain robust. Trading multiples have already reached 15-year highs as investors believe shale gas and better economic fundamentals will combine with low interest rates.

Partner Anton Ticktin says Asian and Middle East companies will move beyond commodities and further into intermediates, forcing established groups to realign their strategies and portfolios. US companies are expanding upstream and downstream to maximise exposure to their energy and feedstock advantage. Transformative, “step out” deals will allow companies to find growth or competitive advantage in areas such as food ingredients, agrochemicals, catalysts, oil and gas chemicals and the ethylene chain.

He believes the European chemical sector will soon be unrecognizable compared with just a few years ago with companies such as Solvay, BASF and DSM acquiring smaller competitors whilst divesting upstream.

“But the surprising consequence of this could be an even stronger European chemical industry: having been the first to act it could become the most sheltered from global competitors and actually benefit in the mid-term.”

We also present the first ICIS Deal of the Year, selected by senior ICIS editorial staff. This is Oman Oil Company’s acquisition of oxo-alcohol producer Oxea from private equity group, Advent International. With sales of €1.5bn tonnes/year ($2.1bn tonnes/year) in 2012 and 1.3m tonnes of capacity, it is estimated to be among the largest in chemicals in 2013 as well as being important from a strategic perspective.

By Will Beacham