Engineering News

More Takeovers Are Expected In US Chemical Sector
Thursday, July 17, 2008

The U.S. chemical sector is likely to see a new wave of deals in coming months, driven by strategic buyers seeking to build a more profitable and streamlined portfolio of assets.

Moreover, valuations in the chemical sector have undergone a sharp correction since the heady highs of last summer, when a spate of private equity buyouts buoyed the share prices of U.S. chemical makers.

"Are we going to see more deals? No doubt," said Ben Johnson, a Morningstar analyst.

"But I think deals the size of what we saw between Ashland- Hercules are more likely than another Dow-Rohm and Haas type deal."

Dow Chemical, the largest U.S. chemical maker, agreed last Thursday to acquire the specialty chemical maker Rohm and Haas for $15.3 billion, narrowly nudging past a bid from BASF of Germany.

In a similar move, Ashland, the chemical maker and producer of Valvoline motor oil, said Friday that it would acquire its rival Hercules for $2.6 billion in cash and stock.

An HSBC analyst, Hassan Ahmed, said companies seeking to consolidate were more likely to focus on U.S. specialty chemical companies over their European counterparts.

"It makes more sense and you have cleaner specialty assets in North America," Ahmed said, noting that European specialty companies were burdened by some unattractive assets in their portfolios.

A Longbow Research analyst, Dmitry Silversteyn, said the paint and coating maker Valspar was a likely target because its shares were selling at a large discount to historical valuation levels.

Valspar shares have fallen about 35 percent over the last year, mainly because of the slump in the U.S. housing and construction markets.

Valspar is also noteworthy because some of the biggest deals in the chemical sector over the last year involved companies that produced paint and coatings.

Examples include Akzo Nobel's $16.2 billion acquisition of ICI, PPG's $3.1 billion takeover of SigmaKalon and Dow's offer for Rohm and Haas.

"The companies that will be bought will be strong operating companies with few operating issues and companies with streamlined portfolios," Silversteyn said.

Cabot Microelectronics is also a possible target as it is selling at the low end of its historical range, he said.

Shares in the company, which makes slurries used in the manufacture of semiconductors and disk drives, have fallen more than 50 percent from a high of $46.61 last year as its profits have been hurt by cost pressures.

In a note to clients, a Jefferies analyst, Laurence Alexander, said Albemarle, Cytec Industries and Lubrizol could all prove attractive for strategic buyers because of their market-leading franchises and improving competitive positions.

The depreciation of the dollar versus the euro over the past few years has made American assets look particularly attractive to European companies.

"BASF is going to be the other big acquirer because we know that their financial position is fantastic," said Ahmed, the HSBC analyst. "We also know that they were one of the bidders" for Rohm and Haas.

Last week, BASF's chief executive, Jurgen Hambrecht, said he expected consolidation in the chemical sector to accelerate, citing lower asset prices and cost pressures as key drivers.

BASF has sold weak performing assets and trimmed highly cyclical businesses. In a move to broaden its specialty assets, the company has acquired the U.S. catalyst maker Engelhard, the construction chemicals business of Degussa and the U.S. resin maker Johnson Polymer.

Aside from the array of potential targets, Silversteyn, the Longbow analyst, also said there might be a competing bid that emerges for Hercules.

"There is a lot of value given all the work that the company has done over the last two to three years," he said. "I don't think that value is being given full credit by the acquisition price that Ashland is proposing."

Source: Reuters - International Herald Tribune

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