Chemical Deals Prove Slow Burners

M&A activity in 2009 took a hit as the global financial crisis rocked markets. As things start to pick up Muriel Axford takes a look at the factors affecting industry buy-outs.

Merger and acquisition (M&A) activity in the chemical sector since the start of 2009 has reflected the difficulties faced by the world's economies and financial markets. Global consultancy PricewaterhouseCoopers (PwC) says total deal volume during the first half of 2009 compared with the same period of 2008 was down 7%.

At the same time, according to PwC's 'Chemical Compounds: Second quarter 2009 global chemical industry mergers and acquisitions analysis', the volume of deals with a disclosed value greater than $50m decreased 43% in the same period. The fall off in appetite for deal making in the chemical sector at the start of 2009 perhaps comes as no surprise.

PwC figures do show, however, that the deal volume in the second quarter of 2009 rose 15% compared with the first quarter. PwC global chemicals leader Saverio Fato says financial market turbulence has made an impact on all aspects of the chemicals industry value chain.

"Financial market turbulence has made an impact on all aspects of the chemicals industry value chain."

"While small and mid-sized deals kept M&A volume on track through 2008, the chemicals industry remains highly susceptible to demand fluctuations caused by the current market environment," Fato says. He adds, however, that there is some hope.

"As China and other emerging markets rebound faster than perhaps the more mature markets, there is potential for an increase in deal activity, which could positively impact the industry as a whole," he explains.

In 2008, it was a different story with M&A activity increasing in the global chemical industry.

PwC reported that 869 deals were announced during 2008, surpassing the deal activity announced in 2007 and 2006, which totalled 853 and 760 respectively. PwC contends that the healthy activity in the midst of a faltering global economy was down to the large number of small and mid-sized transactions announced in the chemical sector.

Size doesn't matter

Indeed it is the smaller deals, now often fuelled by a need to sell, that have been the backbone of ongoing M&A activity. Speaking at the Pharma ChemOutsourcing conference held in New Jersey, US, during September 2009 investment bank Lincoln International's managing director and co-head global chemicals Chris Cerimele said that while uncertainty was having an effect on the appetite for M&A, there were still buyers looking for bargains and there were still sellers needing to offload assets to meet debt obligations.

"Bankruptcy, underused assets and distressed sales typified much of the M&A activity in the early part of 2009," Cerimele said. "Businesses experiencing falls in revenue and unable to access interim financing have had to put assets up for sale. But, at the same time buyers are becoming more selective about what they spend their money on, and strategic deals are coming to the fore."

"Strategic investors were the driving force in M&A activity during 2009, accounting for 87% of the deal value during the first half of 2009."

Cerimele's sentiment is reflected by PwC's findings, which indicated that strategic investors were the driving force in M&A activity during 2009, accounting for 87% of the deal value during the first half of 2009.

Some notable deals have been announced or completed during 2009, including the acquisition of Celenese's polyvinyl alcohol resin (PVOH) business by Japan's Sekisui Chemical Company for $173m. The agreement was completed on 1 July 2009 and the sale included assets in Texas, US, and one unit within a complex in Tarragona, Spain.

During September 2009, Huntsman Corporation announced that it had filed the required paperwork with US federal officials to gain anti-trust clearance for its $415m acquisition of Tronox's titanium dioxide and electrolytics business. Tronox had previously signed for bankruptcy protection in January 2009.

Dow's divestments

Arguably the most high-profile deal to hit the buffers right at the end of 2008 was the plan between the Dow Chemical Company and Kuwait's Petrochemical Industries (PIC) to establish a joint venture company. The joint venture, which Dow said would have "freed up $9bn in pre-tax cash proceeds to invest in our Performance business," was cancelled by PIC.

The collapse of the deal cast a shadow over Dow's planned $18.8bn purchase of speciality chemicals company Rohm and Haas. The acquisition was eventually completed during April 2009, but not before Dow put in place a programme of divestments, which have been ongoing during the year.

During October 2009, Dow announced it had completed the divestiture of its interest in Morton International. Dow's share was sold to K+S Aktiengesellschaft for $1.675bn. Dow added that approximately $1bn in proceeds from the transaction was used to pay the outstanding balance of a bridge loan used to partially fund its acquisition of Rohm and Haas.

Dow chairman and chief executive officer Andre Liveris said this allowed the company to get ahead of its plans. "With this transaction, we have accomplished our objective of fully paying off the bridge loan and eliminating this financing facility," he said.

"The collapse of the PIC deal cast a shadow over Dow's planned $18.8bn purchase of speciality chemicals company Rohm and Haas."

"We remain ahead of schedule on all other financial milestones related to the Rohm and Haas acquisition."

Other sales have included Dow's Calcium Chloride business to a "strategic chemical industry buyer" for more than $210m along with Dow's interest in Total Raffinaderij Nerderland to Vealero Energy for approximately $725m. Both deals were completed in May 2009.

"These asset sales at valuations that result in significant de-leveraging represent another major step in the acceleration of Dow's divestiture and de-leveraging plans, despite a challenging economic environment," Liveris said.

New M&A sparks

There is some agreement that while the conditions will remain challenging, a plateau has been reached. According to Cerimele; moving into the final quarter of 2009 there have been signs of better liquidity in the cashflow debt market, along with increasing M&A chatter. "In the wider M&A market there are signs of increasing activity and while the credit market remains depressed there are increasing signs of life," Cerimele said in September.

At the same time, PwC points to China as the source of rising M&A activity. Demand for petrochemicals and plastics in the country is expected to rise each year over the next decade and its chemical industry is expected to grow at an average rate of more than 10% through 2016. It is clear that China has committed massive sources to encourage domestic consumption and that it has targeted international growth for its companies," PwC's report said.