Chemical Industry M&A Experiments Fizzle
|Aug 11th, 2013 | Filed under: Alpha Strategies, Private Equity, Today's Post | By: cfaille||
Mergers and acquisitions activity has been flat in the chemicals industry.
A new report from global consultancy A.T. Kearney suggests that in large part this is a piece of unintended fall-out from the easy-money policy of the U.S. Federal Reserve.
Cost of Borrowing
Of course, the cost of borrowing has been very low of late, and intuitively one might think that would be a positive sign for M&A activity. But according to Kearney’s midyear trend review, the low rate of interest has been a negative. Chemical assets go onto the M&A market when a prospective target firm finds it difficult to get financing and it has to open itself to takeover. That hasn’t been happening under QE-infinity conditions.
Petrochemical companies in particular have seen “attractive returns from internal capital projects,” thus reducing their appetite for deals with other firms.
The other side of that observation is that the prospect of “tightening economic policies in the U.S.” (the taper, though the report doesn’t use that term) supports asset availability. Private equity may be particularly well positioned to take advantage of this availability in the near future.
There is a distinction to be made between activity in bare numerical terms and activity in aggregate value terms. U.S. deal activity (number of deals) was flat through the first half of 2013, but it “increased sharply in value, supported by private equity deals.” The three top-value deals of the first half of 2013 have been entirely U.S. domestic deals. Carlyle Group bought DuPont Performance Coatings for $4.9 billion: Georgia Gulf bought PPG Industries (a commodities chemical business) for $3 billion; Ecolab bought Permian Mud Service for $2.3 billion.
Private equity is especially interested in “Specialties and Fine Chemicals,” which are more expensive than commodity chemicals.
As you can see from the figure above, based on Dealogic numbers and A.T. Kearney analysis, chemical M&A transactions hit a deal value of $123 billion in 2007, just as the mortgage-derivatives bubble burst. There was a sharp decline in deal value to less than half of that by 2009, then a recovery to a new high of $151 billion in 2011.
Drivers of Deals
But that’s when the assets disappeared from the markets as mentioned above, and deals measured in either raw numbers or dollar value dropped in 2012 to even below the 2009 level.
There are of course various reasons why a target might be attractive, and Kearney’s report gives a break-down of the drivers of these first half deals. None of the deals done this year has as its driver one of the first possibilities that might occur to an outsider: business diversification. Three of the four most common drivers, though, are various sorts of market expansion: by competency, regional expansion, or product portfolio. Another common driver, equal in frequency to any one of those, is backward integration [that is, a merger in which the target is a supplier of the purchaser].
Deal flow is international, and although deals within and among developed countries are still dominant, acquirers from developing countries, China in particular, continue. These developing-buys-developed mergers accounted for only 2% of number of transactions in the whole period 2003-2011, but accounted for 3% in 2012 and 3% again in the first half of 2013. If you look at dollar value, the corresponding percentages are 7% (2003-2011), 8% (2012), 9% (2013 H1).
The report also includes a Q-and-A with Ron Ayles, managing director of Advent International, a PE firm very active in the chemicals area.
Asked how the European debt crisis has affected the M&A market, Ayles said that it has made strategic investors more cautious about their purchases. It has also made some buyers more cautious, waiting for an expected eventual recovery in Europe so they won’t rue the sale of an asset at a suboptimal price.
He also said that Advent finds the chemicals sector appealing because it is an area in which they’ve created for themselves a competitive edge. Their successful track record has led to a perception that they are “a reliable partner for chemical players” and that they can “contribute operationally to target companies’ value creation.”
Advent recently acquired Cytec Coating Resins, a leading supplier of resins for architecture, industrial, and OEM purposes, based in Europe. The former Cytec Coating is now known as Allnexk, a transaction first announced in October 2012 but completed on April 3, 2013.
Ayles said: “We are convinced that by carving out Allnex from Cytec and establishing it as a standalone business, Allnex will better capture market opportunities.”
Christopher Faille is a Jamesian pragmatist. William James has taught him, for example, that "you can say of a line that it runs east, or you can say that it runs west, and the line per se accepts both descriptions without rebelling at the inconsistency."