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Maintaining M&A Momentum In The Chemicals Sector « Back
Selina Harrison, June 2012
In 2011 the aggregate value of deals conducted in the global chemicals sector reached record levels. According to investment bank Young & Partners, last year, chemical deals over $25m generated a record $82bn (€62bn) in value, eclipsing the previous record of $56bn set in 2007 and more than doubling the $39bn generated by such deals in 2010. While the 83 deals completed last year marked a significant increase on the 63 deals completed in 2010, aggregate deal volume failed to break records. Even so, the 17 deals in excess of $1bn that were completed during the year – including Solvay’s acquisition of Rhodia for $4.6bn and Lonza’s purchase of Arch Chemicals for $1.2bn – were a primary driver of the record dollar volume.

While economic factors make it hard to judge whether deal activity in the chemicals sector will continue to generate record levels of value going forward, the industry has showed remarkable resilience over the past decade. In a recent report ‘Maintaining M&A momentum in chemicals’, the Boston Consulting Group (BCG) observes that the sector has shaken off the financial crisis and the subsequent global demand slump to achieve strong revenue growth and above average profit margins.

To gain more insight into how the chemicals sector has managed to flourish during this time, focusing on deals with a value of $1.5bn or more, BCG has identified the main factors driving M&A activity.

Strengthening differentiation and innovation. Over the last decade, buying technology to strengthen differentiation and innovation was the motivation for 42 percent of chemical sector deals, according to the report. While dealmakers in the more environmentally conscious segments have used this rationale to make acquisitions that give their products more weight in anticipation of tougher regulation on carbon emissions, there have been technological opportunities in the raw materials arena. Indeed, through its $8.1bn purchase of Nalco in 2011, Ecolab was able to obtain Nalco’s sector-leading water treatment technology to mix its cleaning and sanitisation products.

Building segment leadership through consolidation. Certain segments of the chemicals sector, such as agricultural chemicals and industrial gases, are highly consolidated, with the top five players in each segment sharing more than 50 percent of the market. However, although consolidation in other segments of the chemicals sector is quite low, the report suggests gaining market leadership still motivated around 40 percent of chemicals deals over the past decade. This consolidation is occurring because many acquirers are buying divisions or sets of assets that provide diversified producers the opportunity to exit segments of the company that are no longer aligned to their strategic objectives. For example, helping to establish itself as one of the world’s largest independent petrochemical companies, in 2005 Swiss company Ineos acquired BP’s olefins, derivatives and refining subsidiary Innovene for $9bn.

Acquiring chemical assets for financial return. Although strategic buyers took over the M&A playing field in 2011, as financial buyers were constrained by the lack of available high-yield debt financing, Berkshire Hathaway still managed to take over Lubrizol in a deal worth $8.8bn. Furthermore, between 2001 and 2011, private equity firms and other financial institutions showed consistent interest in chemicals assets, with financial sponsors supporting 30 percent of all chemicals deals conducted during this period. Financial sponsors are willing buyers for producers looking to divest their broadly varied business portfolios, and the chemical industry has welcomed this interest. Despite the recent slump in activity by financial sponsors, this trend will continue going forward.

Cutting costs by combining operations. In recent years, many companies have sought to reduce costs by buying related businesses and combining logistics, production, sales teams and research and development operations. For example, in 2007 Dutch multinational Akzo Nobel acquired UK-based Imperial Chemical Industries in a $16.3bn deal, and then folded the diversified producer into its paints, performance coatings and specialty chemical units. According to the report, the ability to cut costs has been the motivation behind 19 percent of deals over the past decade. In the current climate, chemicals companies should continue to employ M&A, among other strategies, to achieve costs saving synergies.

Acquiring high-margin downstream businesses. Given that upstream segments of the chemicals industry generally comprise low margin commodity businesses, producers in these segments are often looking for downstream assets, which often command higher margins. Deals for downstream chemical assets comprised 17 percent of the deals BCG analysed between 2001 and 2011, and the firm expects this trend to play a sizeable role in chemicals M&A in 2012.

Reducing exposure to business cycle. Since the global recession, diversified producers have moved aggressively to shed cyclical business lines and build up their presence in markets with less sensitivity to economic fluctuation. Such activity has accounted for 17 percent of large deals over the past decade and most M&A players motivated to reduce cyclicality have traditionally relied on customers in highly cyclical sectors, such as the automotive and construction sectors, and have used M&A to access customers less affected by the business cycle. Even so, chemicals companies have also caught on to the trend. Indeed, BASF, the largest diversified chemical company in the world, has engaged in a string of large acquisitions in recent years, buying Johnson Polymers, Engelhard, Ciba and Cognis, all of which serve markets that tend to hold up well during economic slowdowns.
Expanding into emerging markets. Western chemical sector players have made little headway into the industry in the emerging markets over the past decade. According to the report, such deals accounted for just 13 percent of deal activity in the period.
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