Global merger and acquisition (M&A) activities in the chemical industry have remained robust. Year 2016 will be known as the year of mega deals, with the value of chemical M&A totaling $ 46.9 billion. This is lower than the $ 65 billion in 2015, for those over $ 25 million in size, according to Young & Partners. If the DuPont-Dow Chemical deal had come through in 2016, it would have helped close the gap with 2015. In terms of volume of transactions, more than 61 deals over $ 25 million in size were completed through Q3 2016 versus 91 deals for all of 2015.
A year of mega deals for chemicals M&A
The $140 billion DuPont-Dow Chemical merger is awaiting for the European antitrust approval. Both companies offered to sell some research and development capability, addressing regulatory concerns that a combined agri-company might launch fewer new crop protection products.
The $ 43-billion acquisition of Swiss firm Syngenta by ChemChina is China’s largest cross-border transaction. This deal is also awaiting regulatory approval. Divestments from Syngenta’s businesses in Europe are expected, along with small divestments from some units in the US.
The $ 66 billion acquisition of Monsanto by Bayer will soon start its European approval process. The US Department of Justice and the Committee on Foreign Investment in the US (CFIUS) are both considering the deal. A total divestment of Covestro, after the shares rocketed in their first year trading on the stock, would give Bayer the spare change it needs.
ChemChina’s purchase of Syngenta and the combination of DuPont-Dow Chemical are heading towards the European antitrust approval, an important hurdle for the first two of three politically charged mega mergers reshaping the global food industry.
There were also other M&A deals, much smaller.
The $ 3.8 billion acquisition of US-based Air Products’ performance materials division (PMD) by Evonik. PMD is involved with epoxy curing agents, polyurethane additives and specialty additives. Lanxess announced its € 2.4 billion acquisition of US-based Chemtura (lubricant additives, flame retardants). Finally, BASF acquired Chemtall, part of Albemarle and a surface treatment producer, for $ 3.2 billion.
Key trends in chemicals M&A
Big companies are looking for scale and seek to strengthen their position through M&A. The purchase of product lines complements their existing offerings or allows them to move into potentially lucrative areas aligned with their strategic goals. The DuPont-Dow Chemical merger reshaped the combined company in three distinct entities, agriculture, material science and specialty products.
The size of future deals will depend on the limited returns on organic growth options, forcing companies to look at acquisitions in order to sustain high valuations. Overall, industry sales only grew by 2.1 percent in 2016, the industry facing declining industrial production and broad inventory rightsizing by many of its customers.
High valuations have characterised these deals, the result of an abundance of money chasing a limited number of deals. For example, Lanxess is paying a multiple of around 10x trailing 12-month EBITDA of € 245 million for Chemtura, and about 7x including expected synergies.
Low oil prices have put additional pressures on chemical companies. Naphtha-based producers have benefited from low oil prices as this has led to materials cost reductions of about 60 percent for some companies, improving profit margins. Fracking and the shale revolution have also given US chemical producers significant advantages over their European counterparts. For companies that sell petroleum-based products, lower oil prices have led to sharp top-line declines, sometimes in the range of 30 to 40 percent.
China and other Asian players will play a more prominent role in M&A as they seek to grow and add capabilities. China has emerged from a minor position in chemicals M&A ten years ago to become the second largest market after the US. ChemChina is today a major player in international chemicals.
Private equity firms have not been as active as in the past several years. Instead, strategic buyers have been more aggressive. But, private equity firms are still at the M&A table looking for good deals when they can be found. Carlyle bought Atotech (metal and surface finishing coatings and chemicals for electronics and industrial) from France’s Total in October 2016 for $ 3.2 billion, or 11.9x 2015 EBITDA. Blackstone re-entered the chemical space after several years of absence with the acquisition of Solvay’s acetate filter tow business for around € 1 billion, or 7x EBITDA.
Along with valuations, M&A activity is largely expected to remain robust in 2017 given the challenge many of the chemicals companies have to generate organic growth. Large companies are willing to pursue acquisitions in order to boost their revenues and organic growth. The focus may be less on emerging markets, as growth in China, Brazil and Russia has slowed down, at least for now.
The new US administration is likely to embrace policies that are in opposition to free trade and globalisation as well as reduce regulations on businesses. This might stimulate domestic manufacturing investment, but could upset trade flows, impacting producers that rely on access to international markets.
Dr Mosongo Moukwa is director of technology at PolyOne, USA, and was recently an independent consultant based in Chapel Hill, USA, and vice president – technology at Asian Paints Ltd, Mumbai, India. He is a member of the American Chemical Society and Product Development Management Association.
Opinions expressed here by the author are his own and do not represent the views of the company