The chemical industry has been enjoying a frenzy of mergers and acquisitions (M&A) activity for most of this decade. This has been driven by ready availability of cheap finance, a sustained upswing in the chemical cycle, and tepid economic growth. This last factor has left CEOs who are eager to grow their companies few options other than M&A.
Fitting the M&A jigsaw together may be more complex
The growth in M&A has kept the bankers and consultants happy, and has also led to inflating valuations which have spiralled from multiples of 6-8X earnings before interest, tax, depreciation and amortisation (EBITDA) 10-15 years ago to reach 10-15X or even higher today. In May 2018 US company IFF struck a deal worth over 20X EBITDA to buy Israel’s Frutarom. These kind of valuations mean it could be seen as a great time to clean up a portfolio and divest non-core assets. But it also makes acquisitions much more expensive and harder to justify to investors and shareholders.
According to some M&A experts (see pages 31-34) the era of the mega-merger and easy growth through consolidation of direct competitors is now drawing to a close. Consolidation has been going on across several sectors for a few years and competition concerns may reduce this type of deal activity. After the last wave of mega-mergers, however, there are a lot of smaller businesses on the market which have to be carved out of those mergers. This means future M&A activity could involve smaller, more complex deals where new business areas are added to existing conglomerates. These types of deals require careful planning. It is easier to merge a similar business and find synergies. Integrating a more specialty or service-driven business into a commodity company can be fraught with difficulties, and value-destroying rather than value-adding. Joining a 15X EBITDA downstream asset with a 7-10X conglomerate may be difficult to justify.
CIRCULAR ECONOMY PLAYS BIGGER ROLE
The circular economy is playing a more important role in M&A, with the number of related deals doubling from 2016 to 2017. Companies, especially in plastic packaging, want to get involved in this growing area as they can see a threat to demand for virgin resin which could affect their businesses in the longer term. The plastics recycling sector is still relatively in its infancy and there are numerous opportunities for joint ventures or equity investments.