BUSINESS
RECORD YEAR FOR CHEMICAL MERGERS
“Momentum is everything,” Chalmers says. Private equity buyers, however, did feel the impact of tightening credit markets. They were responsible for 28% of the transactions in the first half of the year but only 17% in the second half. Private investors typically account for 20–30% of M&A Companies PURSUED CHANGE in 2007 activity, making them “material but not in spite of credit market turmoil drivers” of overall deal-making, according MELODY VOITH, C&EN WASHINGTON to Young. In 2007, however, private equity firms were involved in four of the top 10 deals. industry has been on an upswing since the And PwC, in its chemicals M&A report, DESPITE ALL of the talk about a possible early 1990s. Young attributes this to perwrites that bidding by private investors recession this year, analysts may look back sistent restructuring. “At that time, growth forced chemical companies to offer more on 2007 as the year of the big deal. Good slowed, and the winners and losers shiftin order to win takeover bids. economic conditions that began in 2006 ed,” he observes. “Chemical firms realized Young & Partners measures a deal’s created a pipeline of major acquisitions that size was not the key, but that they need worth by dividing its value by the target that retained a strong flow throughout the to be a leader in their industry to do well.” company’s earnings before interest, taxes, year, even as debt markets tightened. One deal that is not reflected in Young & depreciation, and amortization. For basic Of the 81 mergers and acquisitions Partners’ figures—because it was completchemical purchases, this ratio increased to (M&A) worth more than $25 million in ed just after the end of the calendar year—is 8.2 in 2007 from 7.1 in 2006. Basic chemical value that were completed during the 2007 deals were a slight majoricalendar year, 11 were ty of the 81 deals overall in valued above $1 billion, BROKEN RECORD 2007, a reversal of 2006. six more than in 2006, Dollar value of deals exceeds 2006 record, but 2004 is still the top year For specialty chemicals according to Young & for number of deals acquisitions, the ratio was Partners, an investment 10.3 versus 10.5 in 2006. banking firm that proNumber of transactions $ Billions 100 60 Overall, the chemicals vides merger, acquisition, 80 sector was neither a selldivestiture, and other ser40 60 ers’ nor a buyers’ market, vices to chemical and life 40 according to Young. sciences firms. 20 The abundance of large 20 0 0 transactions propelled THE MOST ACTIVE 1997 98 99 00 01 02 03 04 05 06 07 1997 98 99 00 01 02 03 04 05 06 07 the total deal value for the geographic market was NOTE: For deals valued at more than $25 million. SOURCE: Young & Partners year to $55 billion, well Europe, Young & Partners above the record of $42 found, accounting for Akzo Nobel’s purchase of ICI, valued at billion set in 2006. “The billion-plus dollar 47% of the businesses sold, up from 42% more than $16 billion. Announced on Aug. deals are very important in percentage dolin 2006. The U.S. was home to 30% of the 13, 2007, and finalized on Jan. 2, the coatlar volume, representing about 70% of the businesses, an increase of two percentage ings and specialty chemicals acquisition total,” Young & Partners President Peter points, and firms in Asia and the rest of the illustrates the strength of bidding late in the Young says. At 81, the overall number of world represented 23% of the deals, down year in spite of the credit market turmoil. transactions “was not a record in number, three percentage points. Chemical firms In fact, the second half of the year was which was 86 deals in 2004, but it was still looked outside their geographic borders particularly busy, with $40 billion in deals very high.” for buyers or sellers in 63% of deals. completed. “The pipeline was extremely The high deal volume in 2007 was likely PwC, using criteria different from strong—there was a lot of momentum,” due to the same economic factors supportYoung & Partners’ to track M&A totals, PwC’s Chalmers explains. “Any deal with ing the 2006 record, according to Bruce found that Middle Eastern companies a fundamentally sound business case Chalmers, transaction services director at were responsible for a quarter of the 2007 stayed on track, even when lending the tax and advisory services firm Pricedeals worth more than $1 billion. Drivers conditions changed.” The weak spots in waterhouseCoopers (PwC). “The global for the activity included access to low-cost the economy, such as the U.S. housing economy and capital market conditions petrochemical feedstocks, companies’ market, did not have a global impact. were attractive to sellers who wanted to financial wherewithal, and a desire to make major changes with divestitures,” he says. “It was also attractive to bidders because of the availability of good financing options for buyers.” PwC compiles a chemical M&A survey that competes with Young & Partners’. Overall, merger activity in the chemical
“Chemical firms realized that size was not the key, but that they need to be a leader in their industry to do well.”
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BUSINESS
SPENDING SPREE
All of the top 10 deals in 2007 were valued above $1 billion ACQUIRER
TARGET
Basell Holdings Saudi Basic Industries Corp. Reliance Industries Givaudan Carlyle Group Abraaj Capital LG Chem MBO National Titanium Dioxide CVC Capital Partners
Lyondell Chemical GE Plastics Indian Petrochemicals Quest International PQ Corp. Egyptian Fertilizer LG Petrochemical MacDermid Millennium Inorganic Chemical Taminco
VALUE ($ BILLIONS)
MONTH COMPLETED
19.4 11.6 2.9 2.3 2.2 1.9 1.6 1.3 1.1 1.1
December August September March July June November April May August
SOURCE: Young & Partners
expand operations down the value chain, according to Chalmers. Saudi Basic Industries Corp.’s purchase of GE Plastics for $11.6 billion is an example of a Middle Eastern company looking to diversify its products and increase access to global markets. The renamed SABIC Innovative Plastics brings to the Middle Eastern company customers in a wide range of industries, including automotive,
health care, consumer electronics, transportation, packaging, construction, and telecommunications. Other examples of 2007 deals originating in the Middle East include the purchase of Egyptian Fertilizers by Abraaj Capital of United Arab Emirates and, in a geographic expansion outside of Saudi Arabia, Cristal’s purchase of Lyondell Chemical’s titanium dioxide business.
Looking ahead to 2008 and beyond, Young & Partners sees a continuation of the same factors—industry restructuring, portfolio rearrangement, financial buyers, and consolidation—driving a high volume of M&A activity. However, an economic slowdown or recession would cause financial buyers to continue to lose purchasing power. Companies with money to spend will keep buying in 2008. Dow Chemical, for example, will receive a $9.5 billion payment from Petrochemical Industries Co., of Kuwait, for half of a petrochemical joint venture. In an earnings conference call on Jan. 29, Dow stated its interest in all acquisitions, small, medium, and large. PwC’s Chalmers anticipates more players entering the scene from emerging markets, including the Middle East and China. “Emerging markets are gaining strength and have growing economies. Now they are more sophisticated crossborder acquirers and have more consumers at home. As industry shifts and adapts to those changes, we will continue to see deals moving forward.” ■
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