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M&A deals will continue to reshape chemical
markets
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Mergers
and acquisitions (M&A) have been an important driver of growth in the
chemical industry. Companies, especially in the western world, faced with low
or no growth have been seeking quick entry into more lucrative markets,
particularly in Asia, while Asian companies, mired in low value commodities,
are seeking more sophisticated products & technologies and looking
westwards. These trends are reshaping the M&A landscape, and ensuring capital
flows both ways. This trend will intensify in coming years.
Strong momentum in 2016
2016
saw 136 M&A deals in the chemicals space, cumulatively valued at $198-bn.
But three – ChemChina’s acquisition of Syngenta ($43-bn); Bayer’s plan to
acquire Monsanto ($66-bn) and the merger of Praxair and Linde ($32-bn) –
accounted for 68% of the total value. This left a long tail of small deals,
numbering 133, accounting for $66-bn.
More
than half the deals announced (54%) were in speciality chemicals.
Rationale for M&A
M&A
happen for several reasons:
To expand scale of operations by adding on
additional capacity for an existing product;
Enhance geographical coverage to
under-represented areas or ones with more attractive growth prospects;
Diversify the existing portfolio of
products & services;
Access novel technologies and products;
Eliminate competition and bring
consolidation of fragmented markets; or
Pare costs by rationalization of
manufacturing operations, manpower etc.
The
pace of M&A deals have risen and fallen, depending on the overall
business climate; the ability of companies to raise finance from capital
markets or other sources; and the risk appetite of managers and owners.
Factors that have contributed to the run-up in the number of deals in the
last few years include strong balance sheets that could be leveraged to raise
resources; and easy access to cheap debt. The global financial crises of 2008
changed the scenario and put the brakes on deals for some time, but the pace
has picked up over the last few years. But there is now a more cautious
approach to deal making.
Role of private equity
A
noteworthy trend in the M&A space over the last decade has been the
growing role of private equity (PE). Unlike earlier, when M&A were
largely a preserve of strategic players in the industry, the new kids on the
block are financial investors who bring a hard-nosed outlook to the
businesses they acquire. Several PE investors continue to invest in chemical
markets, and the leading ones have put together a string of companies with
complementary skills and portfolios. They have not been averse to getting rid
of parts of portfolio that they do not see as a strategic fit, further
contributing to the level of M&A activity. Derided as bean counters with
a short-term outlook – about five years, after which they look to exit – they
remain a formidable force in the M&A space today.
Other
trends driving the increasing portfolio change are tax-free spin-offs and
divestitures, as companies position themselves for innovation and growth. In
2014 and 2015 spun entities had a combined total revenue of about $25-bn.
Recent notable chemical spin-offs include Ashland’s spin-off of Valvoline;
Bayer’s partial initial public offering of its material science business, Covestro;
and Air Products spin-off of its Material Technology business, Versum
Materials.
Rise of shareholder activism
Shareholder
activism is on the rise – especially in the developed world – and has been a
transformative force at several large companies. DuPont, for example, was
prodded to spin-off its significant, but under-performing titanium dioxide,
fluorochemicals and a few other businesses into Chemours. Likewise, Air
Products cited shareholder pressures behind its decision to sell its
Performance Materials business to Germany’s Evonik Industries. Dow Chemicals
too was under a lot of pressure to separate its commodity polymers &
chemicals business from the ‘speciality’ parts of its portfolio, which saw it
put several of the former on the block and eventually to a mega-merger with
DuPont.
Tactical and focused
The
pace of M&A deals has been tempered by a realization that not all have
panned out they way it was hoped. A few have even put the acquirer in a
serious financial mess that forced radical restructuring to pare debt. Far
more commonly, several deals have not yielded the savings anticipated, and
destroyed shareholder value. Consequently, companies are now conscious of the
valuations they pay and more realistic of the likely gains.
Recent
deals have been more tactical and focused; it is no longer just about
improving scale. The string of deals in agrochemicals is a good example of
this. Three large deals – Dow & DuPont, Bayer & Monsanto, and
ChemChina & Syngenta – are all geared towards offering a complimentary
portfolio that includes conventional agrochemicals, enhanced seeds
(genetically modified or otherwise) and integrated plant protection services.
Sure there are elements of geographic expansion: ChemChina is clearly looking
at opportunities beyond its large home market, while Bayer is seeking a
greater penetration of the lucrative US market and dilute its dependence on
Europe. But the fundamental rationale for these three M&A deal remains a
tactical one – a response to how farm productivity will be shaped and
enhanced in the decades ahead.
Quick route to buy growth
M&A
will continue to be an important route to buy growth in a world where
consumption of chemicals is slowing. World petrochemical capacity grew 3.9%
annually between 2010 and 2015, compared to 5.9% in the preceding five years
(of course, there were regional differences). The outlook for the next five
is even more sobering, with global capacity likely to rise by just 3.5% –
even lower than GDP growth. Much of the growth is expected in the emerging
markets of Asia, Latin America, Middle East and possibly Africa and it is no
surprise that these are increasingly target markets for M&A.
M&A
provides quicker market entry, without the headaches of building a
green-field manufacturing site or creating an extensive marketing network
from scratch. The ‘ease of doing business’ in several high growth markets –
India included – can be daunting, especially for western companies used to a
much smoother regulatory and approvals process. The flip side is that utmost
care needs to be taken for due diligence, especially as many target companies
in emerging markets are private and family-owned, and do not have the
transparency that publicly listed firms usually have. There have been several
instances when ugly surprises, which went undiscovered in the appraisal
process, surfaced soon after the deal was done. In the best-case scenario
they can undermine returns from the investment for a few years, but in the
worst case they can completely alter the rationale for buying. Several
examples of both have been seen – even here in India.
Outbound China
A
more recent trend in the M&A space has been outbound activity by
aggressive Chinese companies. 2016 saw as many as 173 deals across several
industrial sectors, adding to $130-bn, with companies in Europe being prime
targets. Their rationale has been two-fold: tie-in access to critical raw
materials & resources (minerals, metals, crude oil, gas, etc.); or
develop advanced technical capabilities and expertise. While the former set
of deals, by virtue of being larger, have hogged headlines, the latter –
larger in number, but smaller in value individually – have gone unnoticed.
There
is growing realization – in the Chinese government and in companies – that
the overcapacity in several chemical value chains is unsustainable and
destroys economic value, and that a reorientation to a more sustainable path
of growth, emphasizing differentiated products and technologies, is very much
needed. The ChemChina acquisition of Syngenta is a good example of this. In
the years ahead, expect to see several smaller deals as Chinese companies
venture overseas.
China’s
state-owned enterprises (SOEs) have hitherto dominated deal making, and their
ability to marshal large resources will keep them at the fore of the
international quest. But with a shift towards enhancing capabilities in fine
& speciality chemicals, privately owned companies will play a larger role
than hitherto.
Inbound into India
The
Indian M&A space has witnessed some inbound activity in the last few
years. Several of these deals have involved international companies buying
into mid-sized, family-owned Indian companies and this trend will continue.
Except for the agrochemicals and the pharmaceuticals space, where one has
seen some outbound deals, the appetite for Indian chemical companies to seek
opportunities abroad will likely be limited. Three reasons can be cited for
this. Foremost, is the lack of managerial bandwidth to handle overseas
acquisitions. The second is the rather poor experience with some deals. Last,
is the perception – somewhat correct – that there are large enough
opportunities here in the domestic market.
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- Ravi Raghavan
http://www.chemicalweekly.com/newstrack/article.php?articlecode=55850&issuedate=2017-02-21
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