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Oct 2009Chemical Industry M&A Prospects

By: John B. Morton

As the current credit crisis eases and business confidence builds, chemical industry M&A activity is expected to return to previous levels.  The same underlying issues that have driven chemical industry consolidation and portfolio restructuring for the past decade or more remain in play and could exert even more influence in the future.

These issues include uneven geographic growth as chemical demand continues to shift to Asia, increased global competition, volatile and uncertain energy/feedstock sourcing, the need to balance capacity, an increasingly restrictive regulatory environment, growing buyer leverage on margins, and ever-changing technology.

Tight credit markets, weak market demand, underused capacity, and weak industry profits have sharply reduced industry M&A activity, starting in 2008 and continuing through 2009.  The number, average size, valuation, and mix between strategic and financial buyers were all affected.


2007 2008 2009*
Strategic Buyers 104.1BB 45.8BB 48.0BB
Financial Buyers 24.6BB 16.8BB 5.7BB
Total 128.7BB 61.6BB 53.7BB
Deals>USD 1 Billion

23

12

9

Total Number of Deals

181

158

74

Average Deal Size 710MM 390MM 726MM

 

 

 

 

 

 

 

 

Note: Figures but for deals are in USD. The table above includes transactions over USD 20 million where transaction value was disclosed.
Source: Capital IQ and company reports; CDI Global analysis
*Jan- October

In 2009, USD 27 billion was accounted for by Dow's acquisition of Rohm & Haas and subsequent sale of Morton International plus Solvay's sale of its pharmaceutical business. The number of larger deals has declined as the market shifted to smaller strategic bolt-ons where funding is easier and risk is lower.  The number and size of Asian deals (particularly in China) are also becoming much more significant.

The data suggest that several types of buyers will drive future chemical industry M&A activity:

  • Large, well-funded multinationals (e.g., Dow, BASF, Akzo, DuPont, Henkel, Mitsubishi Chemical)
  • Asian and Middle East firms (e.g., Sabic, Sinopec, Formosa Plastics LG Chemical, Petrochina, Reliance, Tata) that are playing a rapidly increasing global role
  • Specialty chemical firms that are strengthening their portfolios through strategic deals
  • Private equity firms and other financial buyers (active in 2007 but deal volume declined sharply as the credit crisis unfolded in late 2008 and 2009).

Many financial buyers have large amounts of cash available for investment so activity is expected to grow in the next 12 months.  Financial buyers are likely to pursue opportunistic purchases and will add to their existing investment portfolios. 
 
While chemical industry profits have been buffeted by weak demand and serious overcapacity, recent reports show signs of increased overall manufacturing activity, including in the U.S., Europe, and Asia (except Japan).  China leads this expansion with manufacturing growth for the eighth straight month. The unprecedented global fiscal and monetary intervention has left financial institutions with deep liquidity, but lenders remain cautious as a new regulatory environment unfolds.

At the same time, non-financial U.S. firms are deeper in cash than anytime in the past 40 years (11% of assets). This cash hoard buffers risk but at the same time offers a springboard for strategic growth via M&A.  The situation is similar in other areas of the world.  China is particularly important given the continuing high rate of economic growth, depth of financial resources, and government emphasis on the chemical sector. 

With this mixture of economic uncertainty and opportunity, CDI Global finds that a selective and deliberate search process is especially valuable in both acquisition and divestment situations to create the best match and most value.  This kind of search process is particularly important with Asian investors where the decision-making pattern is quite different.

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John B. Morton

Author: John B. Morton
John Morton has been a member of CDI Global since 1999 based in Wilmington DE and specializing in search assignments for clients in the chemical and related process industries. John is a graduate of the University of Virginia with a B.S. degree in chemical engineering. He also holds an M.B.A. degree from the University of Delaware.

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