There was a 22 percent surge in the value of completed chemical M&A deals in the first half of 2013 compared to the same time period last year, a new analysis says.
That’s the good news.
Still, global consulting firm A.T. Kearney says actual transaction volume remained down – and the anticipated increase in activity that forecasters predicted for the first two quarters of the year never materialized regardless of the favorable stock market conditions and attractive costs of debt.
“It’s a little below expectations overall. We expected both volume and value would be up,” A.T. Kearney partner and chemical industry expert Andy Walberer tells Leo Rommel of Industry Today.
Walberer explains that the 22 percent surge was the direct result of a few high-value deals via private equity investors.
“The fact that value is up and volume’s not suggests that the activity is really being driven by a small number of deals that are relatively large,” Walberer says. “If you want to say it a different way, there’s a concentrated group of buyers and sellers that’s driving the deal activity versus a broad based group that tends to be participating right now.”
Yes, the number of domestic deals in emerging markets decreased – unlike in Europe, where volume reportedly remained stable, according to the aforementioned study.
Still, U.S.-based investments saw their share of total global deal value climb by 14 percent.
Officials say the highest-value transactions were dominated by two rationales: competency additions and regional expansion. Portfolio extensions as well as backward integration also played significant roles.
Dr. Joachim von Hoyningen-Huene, principal in the Chemicals and the Oil & Gas Practice at A.T. Kearney, says the top three deals in the last half-year were completed by U.S. players. Those deals were:
- Carlyle and DuPont Coatings;
- The acquisition of PPG’s basic chemicals unit by Georgia Gulf;
- Ecolab Inc.’s purchase of Permian Mud Services.
The share of domestic deals within emerging economies increased by 4 percent compared to the overall deal value, according to the detailed analysis.
In brief, the U.S. has some rather large chemical players that are diversified and doing portfolio reviews that tend to put large businesses on the market, Walberer explains.
“The U.S. is a source of large businesses that some strategic sellers may put on the market. That’s the first piece of why the U.S. is driving deals,” he says.
Another, he adds, is what’s happening with shale gas.
“The U.S. is a very attractive location as a cheap source of feedstock driven commodity chemicals,” Walberer says. “There are many companies worldwide interested in tapping into the low-cost feedstock within the U.S., which is another attractive driver of deals.”
One way to do that, he says, is to either buy a company 100 percent or take an interest in American firms that have access to that resource.
For these reasons, Chinese players were particularly active in these large cross-border transactions, officials say. This development is consistent with a long-term trend towards increasing activity by acquirers from developing economies in Western countries.
The report also states that large petrochemical players were not involved in high-value transactions.
Kish Khemani, A.T. Kearney partner and chemical industry expert, explains that these big-league players have been shifting their focus from external to internal investment opportunities because of the currently low energy and feedstock prices.
“The expectations about return on investment for these internal projects are significantly higher and as a result, the appetite for external acquisitions was lower in the U.S.,” he says.
In order to re-align their portfolios, some chemical players decided to sell off non-core businesses, which in turn represented attractive investment opportunities for private equity investors. These large deals further increased deal activity in the specialties and fine chemicals sector, and as expected, their share of total deal volume increased by three percent in value terms compared to the inactive petrochemical sector.
In addition to advanced consolidation, a combination of factors played a role in causing chemical sector investors to remain cautious and inhibit the aforementioned anticipated growth, the report says.
Stock markets strengthened, yes, but so, too, did volatility compared to one year ago. The American economy is greatly improved but certainly not yet steady or dependable. Economic concerns remain widespread throughout Europe. China is the midst of a slowdown.
And easy access to capital actually decreased the number of targets available as the necessity to sell off businesses for financing reasons remained low.
These factors, in a classic example of a perfect storm, pumped the brakes on sustainable growth within the market, Walberer says. As a result, the level of confidence across the board, especially with buyers, is not enough to support a higher volume of activity.
“It’s almost like you’re in the minority right now if you’re a buyer, but the few buyers that are interested are willing to make bigger deals, as we’ve seen with some of the big deals that have closed” he says. “I think what it means is out of a population of about 230 chemical companies in the world that are public above a billion dollars in revenue, very few are looking at doing big deals””
It also means that from a strategic-buyer perspective, very few of those are comfortable buying right now. (note to author: may want to delete this sentence given the clarification of the above quote)
“The ones who are buying tend to be more on the private equity side, and there are few of those. So therefore, you see that the overall volume of deals tends to be lower,” he adds. “That won’t pick up until there’s more broad based confidence in the global recovery and when people have a better sense of where demand is heading for the next several years.”
As a result of the slower-than-expected first half of the year, chemical sector M&A deal activity in 2013 is now only expected to grow by 1 percent, not 3 percent like analysts originally forecasted.
Walberer says action was limited because demand in the chemical sector is driven by a couple of areas that were hit very hard during the economic recession.
“Two of the big end use markets for chemical companies are the automotive sector and the construction and housing sector,” he says. “Those were hit very hard during the recession. Auto has kind of recovered, and I think construction is now in kind of a tepid recovery.”
China plays a factor, too.
“I think another element is that pre-recession China was growing at high single digits, and Asia was a big source of growth that many chemical executives focused on, whereas now China, in particular, has slowed down a bit,” Walberer explains. “China still has very good growth, but relative to where it was pre-recession, it’s much lower.”
He adds, “There’s not an obvious place that chemical executives can point to and think, Hey there’s a lot of growth here and that supports my M&A ambition.”
Overall, investors will remain “cautious” moving forward, Walberer explains.
“Some of the catalysts we expected, like maybe a little bit of a faster recovery and confidence in a lot of the associated economic policies that support a recovery, we haven’t seen play out yet,” he says. “We lowered our outlook because we don’t see any signs on the horizon where there’s broad-based acceptance that things are going to be positive going forward. It’s a wait-and-see approach as opposed to a belief that we’ve crossed or cleared a threshold and a lot of people believe that things will improve.”
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