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DealTalk: Fewer big fish means fewer large chemical deals
Wed Jul 18, 2007 3:33PM EDT

NEW YORK (Reuters) - A recent run of large chemical and plastics deals has cut into the list of possible targets, leaving companies and financial firms to fish in smaller ponds.

Chemical deals are up 76 percent globally so far this year and U.S.-target deals are up 325 percent to about $37.5 billion, according to market research firm Dealogic.

A lot of the biggest deals have come to fruition in the past week. Basell ), a plastic and chemical company, said on Tuesday that it would buy Lyondell Chemical Co. for about $12.7 billion.

That came only a week after Huntsman Corp. agreed to be sold to Hexion Specialty Chemicals, a unit of private equity firm Apollo for about $6.5 billion.

With those targets snapped up, small deals will be easier than large ones, observers said.

"It's not like there are excessively large assets out there now, so by a process of elimination that's what you end up with," said HSBC analyst Hassan Ahmed.

Indeed, of the top 10 largest chemicals deals so far in 2007, seven deals have been announced in June and July including the Lyondell sale, according to market research firm Dealogic. Of the top 10 deals, only four were above $5 billion.

"It's more likely that (future deals) are in that $1- to $4-billion range," said one sector banker, "but you never know."

Earlier this year, speculation was rife that some of the biggest names such as Dow Chemical Co. and DuPont could be a buyer and seller in a mega-chemical deal. Dow, which said it is not up for sale, has since said that it is interested in medium-sized acquisitions. 

The driving force for the small deals will continue to be an industry trend to push into more specialty chemicals, the sector banker said.

There is also commodity consolidation still underway. Lyondell, for instance, is a commodity chemical company.

Ahmed said there could be "one last leg of consolidation happening along the commodity lines. The likes of Nova (Chemicals) and Westlake (Chemical Corp.) come to mind."

Other names that have turned up in the past as leveraged buyout opportunities fall into that small chemical maker area, including Hercules Inc. and Omnova Solutions Inc. Jefferies Inc. included them in a note last month about sector deal possibilities.

The next deal that happens may end up being a rival offer for Lyondell itself, traders and analysts said.

In the U.S. options market, many investors held onto their soon-to-expire July calls, allowing them to buy Lyondell shares at $40 a piece before Friday. That is a bet that there could be a higher bid between now and the expiration, one options player said.

"That indicates they are looking for a higher price for Lyondell," said Michael Schwartz, chief options strategist at Oppenheimer & Co. in New York. "This is unusual since these calls expire on Friday with high open interest still outstanding."

Open interest is the number of contracts that need to be exercised or sold on or before expiration.

Source: Reuters

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