|
M&A reshape landscape of chemical
manufacturing; 2017 likely to be a record year for deal making
|
|
Mergers
and acquisitions (M&As) have reshaped the chemicals manufacturing
landscape for several years now. The number and size of deals have varied
from time to time, depending on economic cycles & business outlook, and
the availability of capital, among other factors.
The
rationale for restructuring through M&A are several: wider geographical
reach of the combined entities; larger scale; wider portfolio; access to
technologies; and opportunities to address adjacent or even distinctly new
market opportunities.
2017 – a record in the offing
2016
has seen an average level of M&A activity – in terms of deals completed –
with the total deal value estimated at $94-bn, compared to $119-bn in 2015.
But several high value deals announced last year (and in 2015) are likely to
go to completion in 2017, and for this reason, this year could well see new
records being set.
According
to an analysis carried out by ATKearney, a management consultancy, the
backlog of deals initiated in 2016 – valued cumulatively at $300-bn – is more
than the combined deal activity of the three earlier years. What is also
significant is the size of deals now being implemented. As of early 2017,
four deals, each valued between $40-bn and $70-bn were underway: Dow-DuPont
(announced in 2015 and valued at $69-bn); and three deals announced in 2016 –
Bayer-Monsanto ($66-bn); ChemChina-Syngenta ($47-bn) and Praxair-Linde
($43-bn). In comparison, in the last ten years, not one exceeded a ticket
size of $20-bn. Barring the last, all are likely to see completion in 2017.
Sticking to their knitting
Companies
now prefer to stick to their knitting and staying focussed in their core
portfolio, or to diversify to address close or complimentary opportunities.
This is clearly evident in the area of crop protection, where deals that
combine capabilities in conventional agrochemicals and related areas as seeds
& traits are being forged. The Bayer-Monsanto deal is a good example of
this, as are the Dow-DuPont and ChemChina-Syngenta deals. When completed,
they will radically transform the business landscape for crop protection.
Building scale
The
need to build scale in the chemical value chain is best highlighted in the
restructuring happening for the last couple of years in industrial gases. In
2016, Air Liquide closed its acquisition of competitor Airgas for $13-bn,
while at the end of the year, Linde and Praxair announced their intent to
merge in a deal that would be valued at $43-bn – a record for this industry.
Competition concerns could arise as the business of industrial gases is even
now highly concentrated, with the top five companies accounting for 86% of
revenues.
In
the fertiliser industry, uncertainties over growth prospects in the large
markets of India and China are driving consolidation efforts, especially
amongst key suppliers of raw materials. The Potash Corp-Agrium deal,
announced last year but likely to go though by the middle of this – will be a
landmark, with a size of $18-bn. This industry is nowhere as concentrated as
industrial gases, but the top-five companies still account for a little more
than half the industry revenues. In paints & coatings, the most significant
deal in recent times has been AkzoNobel’s takeover (in 2008) of the coatings
business of ICI, for about $16-bn. The deal was significant in that it marked
the end of ICI as a business entity – a sad fate for what was one of the
world’s most diversified and innovative chemical companies!
Industries
expected to see significant M&A activity going forward include ones in
which customer industries exhibit a high level of consolidation or are
trending in that direction. This includes consumer goods, automotive and
electronics. This could drive M&A in businesses such as home &
personal care, automotive coatings and electronic materials.
Healthy balance sheets & earnings
The
M&A fervour is made possible by healthy balance sheets of companies, with
record cash on hand. Diversified chemical companies are also responding to
market signals that indicate that investors prefer more focussed plays – be
it in commodities or specialties. This is not surprising considering focussed
companies have consistently given higher return to shareholders than their
diversified counterparts with a mixed portfolio. The Dow and DuPont deal will
eventually see the combined entity split intro three verticals, with one
focussed on commodities (leveraging low cost feedstock in the Middle East and
the US, and market access in Asia); and two on speciality segments including
advanced materials and agrochemicals.
China – the new engine of M&A
The
desire of companies in emerging markets – particularly China – to move up the
value curve, access opportunities in more discerning & value-creating
markets, tap into much needed feedstock & raw materials, and to enhance
technical & business capabilities, is the new driver of deal-making.
The
ChemChina-Syngenta deal can be viewed through this lens, with the Chinese
company looking to markets beyond its home turf for conventional
agrochemicals, as well as access to enhanced technical capabilities in seeds
and biotechnology. Indeed, Chinese companies are now the number one acquirers
on the prowl, accounting for 24% of all deals in 2016, reflecting both their
confidence and their ambitions to be seen as more than just local players.
The trend is expected to continue as government-driven consolidation in
industries like coal, steel and chemicals is creating national champions who
have both the political backing and the financial clout to embark on costly,
politically sensitive and time-consuming international forays.
India,
sadly, is far behind, and is likely to stay that way for the near future,
despite several pronouncements from experts that the industry here could look
to overcome its weaknesses such as lack of access to feedstock through
acquisitions and partnerships in feedstock-rich countries.
The Middle East as a potential player
The
ATKearney study also identifies companies in the Middle East as possible
participants in M&A in coming years. Commodity chemicals and plastics now
dominate the portfolios of the region’s major players, but there is a stated
intent to move beyond and downstream into higher value-added products. Saudi
Arabia is most advanced on this path, driven by the urgent need to create
jobs for its sizeable population and to garner better value for its depleting
hydrocarbon resources. But even here the going has not been easy; the small
size of local markets, the lack of commercial intelligence; and even access
to manufacturing technologies have hindered progress and M&A could
provide a fast track to these. While partnerships and joint ventures are
likely to be the more preferred options – particularly for western companies
– M&A between US, European, Japanese, Korean or Chinese companies and key
players in the Middle East cannot be ruled out.
The
strong US dollar, access to domestic feedstock, and a favourable local tax
regime are positives for a resurgent manufacturing industry in the US, and
could also bolster acquisitions by US-based companies looking to markets
beyond their immediate geography.
Possible disruptors
While
all of the above point towards heightened M&A in this and the coming
years, several disruptors could radically change the direction of the
industry. These include macroeconomic factors related to trade and tariffs,
taxation, economic growth and interest rates. The political uncertainties
brought about by Brexit and the US elections could pose challenges for all
sorts of industries, including chemicals.
Valuations
could be a deterrent as well. Deal multiples have been rising and this may
force potential suitors to walk away. Concerns over competition may be
another factor. In some sectors as agrochemicals, fertiliser raw materials
and industrial gases, for example, the number of players of reasonable size
and global presence is now down to a handful. The situation is particularly
so in industrial gases where it is widely believed that the Linde-Praxair
merger is going to be the last big one.
Faster economic growth here to stay
The
outlook for GDP growth seems brighter now than anytime in the last couple of
years, in almost all economic centres including North America, Western
Europe, China and India, as also in countries plagued by recession for the
last few years including Japan, Brazil and Russia. Whether these green shoots
of growth will be sustained, or will be an ephemeral tease that disappeared
as quickly as it appeared is still not certain, but will determine whether
the M&A boost likely in 2017 will be bettered anytime soon.
|
- Ravi
Raghavan
CHWKLY 4APR17
No comments:
Post a Comment