Chemicals groups enjoy M&A revival as pandemic winners flourish
Companies sell off businesses to focus on speciality areas such as Covid vaccine ingredients
The chemicals industry has enjoyed a dealmaking renaissance this year as companies step up supplies to businesses that have flourished during the pandemic.
The rapid pace of carve-outs and buyouts has been driven by a desire to concentrate on high-margin, speciality areas such as the manufacture of ingredients to boost immunity in Covid-19 vaccines.
Cheap financing has helped M&A bounce back with $25.1bn worth of deals in the chemicals sector in the first quarter compared with $41.3bn for the whole of 2020, according to Young & Partners.
“The market is healthy and showing clear signs of a pick-up in M&A volume since the first quarter and for the rest of the year,” said Peter Young, chief executive of the New York-based boutique bank.
Kirk McIntosh at investment bank Piper Sandler said: “The M&A market in chemicals is very strong right now. There are a whole series of drivers of that. At a macro level, there’s a huge amount of capital chasing a home.”
A standout example of the carve-out trend was Switzerland-based Lonza Group’s $4.6bn sale of its speciality ingredients business, LSI, to private equity firms Bain Capital and Cinven, allowing the remaining company to focus solely on the booming healthcare industry.
The sale of LSI, a specialist in controlling harmful microbes, fetched a multiple of 13 times earnings, underlining the interest in the hygiene sector because of the pandemic.
Marc Doyle, chief executive of LSI and a former DuPont executive, said: “There is more awareness and sensitisation to the need for cleanliness. Going forward, we view the opportunity to build this sanitisation capability into more consumer products.”
Another example of the trend is Croda’s plan to sell three-quarters of its performance technologies business that does not relate to the supercharged healthcare and beauty markets that the Yorkshire-based speciality chemicals company wants to focus on.
“The strategic decision was based on the competition for capital within Croda,” said Steve Foots, chief executive of the producer of lipids for BioNTech/Pfizer’s messenger RNA Covid vaccine.
Ronald Ayles, managing partner at private equity group Advent International, expects more of these kinds of deals because he thinks many diversified European chemicals companies need to sell more units before reaching a core of exciting, narrowly focused businesses.
“A corporate decides ‘it’s a good quality business but we can’t do it all at the same time’,” he said, after his firm agreed to sell Allnex, an industrial coatings resin producer to Thailand’s PTT Global Chemical for €4bn.
Some of the demands on chemical companies’ resources comes from the need to plough investment into green technology. For example, companies such as BASF, Johnson Matthey and Umicore are racing to become producers of electric car battery materials.
But equally, some bankers also see environmental pressure as an emerging force in sales or separations of CO2-intensive or oil-linked businesses, although that may not be given as the company’s explicit reason.
“You cannot ignore what’s happening around sustainability. It has ramped up in the last 6-12 months,” said Piper Sandler’s McIntosh.
Solvay is carving out its cash-generating soda ash business used in glass and detergents, which accounts for slightly more than 60 per cent of the group’s CO2 emissions, as the Belgian group simplifies its portfolio.
The French group Arkema sold its acrylic business, which relies on petroleum to create the products, to Trinseo in May. Evonik sold a similar business to Advent in 2019.
One notable exception is Ineos, which has been buying up unwanted fossil fuel assets.
However, Alain Harfouche, managing director at investment and advisory financial services group Guggenheim Securities, reckoned such moves were driven more by efforts of reorienting portfolios towards higher-value sectors that tend to be more resilient to commodity cycles or bumps in the global economy and not just by pressure to reduce their carbon footprint.
“It’s very difficult for companies to move away from hydrocarbons [the chief components of petroleum and natural gas],” he said. “It’s consistent with ‘let’s move away from commodities and specialise’. But it’s not a key driver.”
Sustainability is not the only factor complicating M&A. While private equity groups, which have long picked up unloved, capital-starved assets from chemical conglomerates, have made the most of soaring valuations by exiting early, competition to buy has rarely been higher.
“We’ve got a period where both financial buyers and strategics are keen to acquire. There is never enough supply,” said Leland Harrs at US investment bank Houlihan Lokey.
That has pushed valuations painfully high and nowhere more so than in Asia, where about half of M&A deals in the past six years have been completed, data from Young & Partners show.
The merger of Sinochem Group and ChemChina into a titan with $152bn sales represents the sweeping consolidation taking place in China.
“China are not really easy competitors for western industries,” said Bernd Schneider, global co-head of chemicals at US investment bank Stifel.
The bosses of paint companies PPG and Akzo Nobel both said they wanted to buy Asian rivals after the Fortune 500 company beat its Dutch rival to the €1.5bn acquisition of Finland’s Tikkurila in February. But the hot public markets are proving a stiff obstacle.
Akzo’s chief executive Thierry Vanlancker said that “the area where we would be very excited to do things is in Asia. We would love to do more acquisitions but that is the most difficult market to do it because the local markets have very high valuations. Most of the companies want to list with an IPO.”
Michael McGarry, chief executive of Pittsburgh-based PPG, is embarking on an alternative strategy, citing its recent purchase of German industrial coatings group Wörwag. “We’re trying to get those emerging markets by buying US and western European companies with a global presence,” he said.