A global chemical merger-acquisition season could soon take off
19 March 2013 18:32
HOUSTON (ICIS)--A robust mergers-and-acquisitions (M&A) season in the global chemical industry is primed for takeoff, two industry analysts said on Tuesday.
“There’s a fair amount of these transformation transactions for organisations – both from the buy side and the sell side – that are now starting to happen,” said Mike Shannon, global leader of chemicals and performance technologies practice for KPMG, a global auditing firm.
“I think many of these have been in the works for multiple years. It’s just that the market conditions are now better and more supportive of these transactions occurring,” he said.
After a few years of global economic malaise, M&A activity awoke from hibernation last year with a string of mid-sized deals.
In January, US-based specialty chemical maker PPG completed the merger of its commodity chemicals business with US-based Georgia Gulf, forming the Axiall Corporation. The deal had been originally been announced in July.
In December, PPG agreed to acquire the Netherlands-based AkzoNobel’s North American decorative coatings business to further strengthen its core business.
US-based specialty chemical and materials firm Cytec Industries announced in October its deal to purchase UK-based composite and process materials producer Advent’s coating resins business.
In August, US investment group Carlyle agreed to acquire US chemical maker DuPont’s performance coatings business.
In a broad sense, the deals signaled that companies were emerging from a period of simply trying to survive the economic downturn to planning how to make the most of an economic recovery, Shannon said.
“I think everybody was cautious in terms of taking that leap of faith and doing something that was going to be a change to the organisation or something that redefines the organisation,” he said. “I think we’re starting to see more of that happening now.”
The M&A activity is indicative of the types of deals that will likely occur in the coming years, said Paul Harnick, KPMG’s global chief operating officer for the company’s chemicals and performance technologies practice.
“I think in general what we’re going to see is a continuation of middle-sized deals, albeit I do think there’s a number of companies out there that could potentially go do something larger if they wanted to, especially in the US,” Harnick said.
“There are a lot of chemical companies who sat on a hell of a lot of cash. At some point somewhere down the line, they’re going to get pressure from their shareholders to either go and invest it or to start giving it back,” he said. “Your average executive, given the opportunity, would rather do a deal than just give the money back to shareholders.”
Big deals, if they come, could emanate from emerging markets such as China or the Middle East, Shannon said. The desire is there from companies such as Saudi Arabia’s SABIC and Chinese firms such as Sinopec.
“I still think there’s the potential for one of those larger companies from an emerging market region to make their bold move into the Western chemical industry,” Shannon said.
“We’ve been waiting for that for a few years now, really since SABIC took out GE Plastics [in 2007],” Harnick said. “There haven’t really been any large moves by the emerging markets guys, albeit they continue to talk about it.”
“Certainly, the companies in China and Saudi Arabia in particular seem to be under government pressure to continue to expand and develop downstream,” he said. “I think the issue remains that they find it hard to move quickly enough to actually close deals, to get all the authorisations and the approvals.”
Globally, Shannon and Harnick view North America has a prime merger environment, and see companies actively seeking to get into emerging markets such as China, southeast Asia, India and the Middle East.
But many companies have not made specific plans, as 28% of the firms recently surveyed by KPMG said they have no emerging market strategy.
South America is a more mature market than some areas of Asia with tons of potential for chemical companies, but political instability and the geography make cross-border transactions impractical, Shannon said.
“It’s hard to have a continental approach to Latin America in the chemical industry. You kind of have to have separate entities focus on each market,” he said.
“If you’re doing business in Chile, you need to have a Chilean entity focused on Chile. If you’re in Brazil, you have an entity in Brazil focused on that. But it’s hard to say, ‘Here’s our Latin American headquarters and we’re going to have a strategy for the entire continent,’” he said.
In Europe, economic prospects remain bleak in the near and medium term, with many countries beset by recession.
“In terms of the economic situation, there’s no real light at the end of the tunnel,” Harnick said.
European chemical makers are facing the likelihood of cheaper products flowing out of the US thanks to the North American shale gas revolution. Those products go to Europe or Asia – or to both – and undercut the prices of European chemical makers’ products, Harnick said.
European chemical companies will need to invest in technology and decouple themselves from relying on GDP growth to succeed, Shannon said.
That is a prescription for success not just in Europe but around the world as the global economy enters a period set up for chemical companies to reposition themselves, he said.
Most M&A in the chemical sector will be about a company moving up the value stream, Shannon said, or perhaps even shuffling their collective feet to the beat of the economic times.
“I call it the ‘conga line’, where companies are moving themselves up the value chain and other companies are coming in and buying the assets that are being divested and are able to manage them in many cases for a decent profit,” he said.
That “conga line” could start forming more and more across the globe, Shannon said.
“It’s slow,” Shannon said, “but it’s starting to come to fruition.”
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