Chemicals M&A to persist despite slow Q2

Chemical deal-making fell during the second quarter, but the slowdown marks a blip in the wave of mergers and acquisitions (M&A) that are reshaping the industry.

The consultancy PwC publishes a quarterly report on chemicals M&A. Second-quarter deals fell both in terms of the number of deals announced and their value. Companies announced 30 deals in the second quarter worth a total of $20bn, down from 42 deals announced in Q2 2016 worth $71bn.

The decline partly reflects some big-dollar deals that were announced last year, which include Bayer’s bid to acquire Monsanto. Others are Evonik’s $3.8bn bid to buy Air Products’s Specialty & Coatings business and BASF’s $3.2bn deal to buy Chemetall from Albemarle. Quarter on quarter, the number of deals actually rose 15% from 26 in the first quarter, PwC said. The value rose 33% from $15bn in the first quarter.

The average size of a deal was $679m, down from $1.68bn in from the same time last year and up from $582m in the first quarter.

Looking at the first half of the year, the presidential elections may have caused companies to hold back on deal-making to see how the new administration would play out, said Craig Kocak, US chemicals deals leader for PwC. Kocak did not discuss individual companies, per PwC policy.

In fact, the chemical industry is still in a consolidation phase that should continue in the upcoming years, PwC said in its report.

This longer perspective shows the upsurge in chemical M&A. Companies are making deals in part to find a way to grow when the outlook is so sluggish, Sarathy said.

SMART M&A DRIVES GROWTH

“The industry isn’t growing anything remotely like how it was growing way back when,” he said. “It is mature. When you are in this kind of mature phase, people are looking to grow somehow, and they are targeting M&A.”

Deal-making, however, is a one-time remedy for slow growth, Sarathy said. Once companies cut costs and achieve synergies, they will return to the slow growth levels that preceded their acquisitions. More important, Sarathy said companies will review their portfolios after completing their deals, divesting businesses that no longer fit.

He calls this process the “Big Sort,” and it should result in companies with more logical and coherent portfolios. Once chemical industry players complete this big sort, they should be in better touch with their customers and with the capabilities of their businesses, Sarathy said. By then, they should be in a better position to innovate and expand, thus breaking out of the slow-growth trap.

Regarding second-quarter deals, the largest announced transaction was the $10.4bn merger of equals between US-based Huntsman and Switzerland-based Clariant. It was among the three mega deals announced during the quarter, each of which were worth at least $1bn.

The other mega deal includes NOVA Chemicals’s acquisition of Williams’s majority stake in its Geismar cracker for $2.1bn, according to PwC.

British Petroleum (BP) agreed to sell its 50% stake in the Shanghai SECCO Petrochemical Company (SECCO) to Gaoqiao Petrochemical, a subsidiary of China’s energy major Sinopec, for $1.68bn. Among the major chemical sectors, specialty chemicals was the most active, accounting for 48% of transaction and 78% of deal value in the second quarter.

Financial investors accounted for just 27% of total deal volume in the second quarter, PwC said in the report.

Private equity firms have held back from making deals, in part, because of the high valuations of the targets, Kocak said. Strategic buyers can justify these higher prices through the synergies they can achieve.

In addition, many strategic buyers can use stock to help finance acquisitions, he said.

Some private equity firms could be waiting for companies to divest businesses following their mergers, Kocak said. They may re-enter the market to acquire those businesses once they become available.

By region, Asia and Oceania was the most active, accounting for 43% of deal volume. Meanwhile, Europe accounted for 56% of deal value.

Looking ahead, PwC expects the recent wave of M&A will lead to more deals, as newly combined companies will shed businesses either to comply with the rulings from anti-trust regulators or for financing purposes. Also, money is still cheap and plentiful.

Additional reporting by Niall Swan