Chem company management rewarded for M&A – banker

Interview article by Joseph Chang

NEW YORK (ICIS)–Chemical merger and acquisition (M&A) activity “has been on fire and continues to be” as the management of companies are getting rewarded for growth in all forms, an investment banker said on Tuesday.

“The market – investors, analysts – are rewarding companies that are growing, regardless whether it’s organic or inorganic (via M&A). It used to be that companies were rewarded more for organic growth,” said Telly Zachariades, partner at The Valence Group.

“It also doesn’t seem to faze the market when companies pay healthy multiples for acquisitions,” he added.

For example, when US-based specialty chemicals firm Quaker Chemical announced its merger with US-based metalworking fluids company Houghton International on 5 April, its stock price jumped 7.6%.

The deal values Houghton International at $1.415bn, which includes $172.5m in cash, around 4.3m shares of newly issued Quaker Chemical stock valued pre-deal at $552.9m and the assumption of $690m in net debt.

With Houghton generating $120m in earnings before interest, tax, depreciation and amortisation (EBITDA) in 2016, the deal multiple is a healthy 11.8x 2016 EBITDA.

The Valence Group provided a fairness opinion on the Houghton deal to Quaker Chemical’s board of directors.

“Public chemical company CEOs and boards are more confident in paying a high multiple,” said Zachariades.

“A fairly decent specialty chemical business should have no trouble getting a transaction multiple in the 9-11x range. A highly sought-after company with proprietary technology, high growth and margins could get 15x or more. What used to be 6-7x on the low end and 10x on the high end has clearly shifted upwards,” he added.

Other recent deals in the sector involving US buyers and sellers include Ashland’s planned acquisition of US-based health and wellness, and flavours and fragrances ingredients company Pharmachem for $660m, or 10.5x estimated 2017 EBITDA announced on 17 April, and KMG Chemicals’ buyout of pipeline performance enhancing chemicals producer Flowchem from Arsenal Capital Partners for $495m or 11.5x trailing 12-month EBITDA announced on 24 April.

Ashland’s stock price rose 2.0% on the deal announcement, while KMG’s share price jumped 7.8%.

With interest levels high among both strategic buyers and private-equity firms, it is difficult for the latter to compete on deals, the banker noted.

“It is tougher for private equity in the current valuation environment, but they nevertheless can still prevail in auction situations, particularly the bigger and more diverse the target,” said Zachariades.

“If there is real interest among strategics, private equity will tend not to win. Their share of the market in terms of number of deals has fallen from the 10-15% range, to less than 5%,” he added.

On the sell side, high valuations should be attractive to CEOs seeking to divest non-core assets, or private-equity firms aiming to monetise holdings, the banker said.

Looking ahead, financing costs are likely to creep higher with interest rate hikes from the US Federal Reserve, but the impact will likely be minimal and “won’t materially change the acquisitive attitude”, he noted.

Image: The market is rewarding companies for pursuing M&A, according to one investment banker.