Global chemicals sector eyes specialty M&A deals as profits rise - Fitch
Mergers and acquisition (M&A) activity in the global chemicals sector is taking place at a more measured pace this year, and completed deals were driven by strategy rather than scale, credit-watch firm Fitch Ratings said in a new report.
Fitch said it believes the slower M&A pace likely reflects a healthier chemicals industry where more participants view themselves as acquirers or feel they have compelling standalone growth prospects.
Recently completed deals have largely been strategic moves allowing a company entry into more specialized spaces and diversifying product portfolios.
Strategic acquisitions typically have greater potential upside allowing for greater deal multiples, underscored by an examination of recent historical deal multiples. The median Fitch calculated transaction multiple for chemicals companies has increased to 9.3x for the period ending May 31, compared with 8.9x in 2011 and 8.0x in 2010.
Last week, Eastman Chemical completed its multi-billion dollar acquisition of Solutia, which helped to extend its global reach and also added businesses with unique technologies and differentiated products.
Meanwhile, the recent Cabot-Norit merger gives Cabot entry into the activated carbon market, while Monsanto’s purchase of Precision Planting allows it to provide solutions beyond seeds, traits, genomics, and herbicides to boost crop yield and farm productivity, Fitch said.
Looking ahead, the agency believes potential M&A activity will be tilted toward strategic acquisitions and likely centered in the specialty chemicals sector.
Funding the deals has been relatively easy, as debt borrowing costs remain very attractive. Investor demand for chemicals debt has also allowed companies robust access to markets.
In addition to debt financing, chemical companies have used cash balances and even equity financing, both of which remain alternative options of funding for many.
Fitch says that there does not seem to be a pressing need for chemicals companies to engage in M&A as a growth motivator, as the chemicals industry is benefitting from healthy, mid-to-peak cycle earnings.
For the most part, balance sheets have strengthened, and companies are flush with cash, limiting the number of distressed assets available.
Exceptions include companies overly exposed to Europe and those dependent on high-priced oil feedstocks.
While chemical companies aren't under immediate pressure to achieve growth via M&A, economic challenges remain.
A slowdown of the US recovery, further European economic weakness, and/or lower Chinese economic growth could dampen revenues and earnings, Fitch warned.
Additional information on the report can be read at the Fitch website.
Comments