ICIS WEBINAR: Players gear up for chemical M&A resurgence in H2 2020 – bankers

NEW YORK (ICIS)–Chemical mergers and acquisitions (M&A) activity is poised to pick up in the second half of 2020 as the coronavirus (Covid-19) lockdowns ease, and buyers and sellers prepare to get a start on making deals once again, investment bankers said on an ICIS Webinar on Tuesday.

“What we’ve seen is a significant rise in bilateral, one-off conversations. When you have management teams or sponsors or bankers who are no longer making trips to Asia, Europe, etc, suddenly people have more time to be on a call for half an hour or have an introductory call,” said David Ruf, managing director and head of chemicals and materials at KeyBanc Capital Markets.

“When you think of it from that perspective, there’s a fairly active level of dialogue going on right now,” he added.

Global chemical M&A activity slowed on the order of 30-40% in Q1 year-on-year, with March the most impacted from the coronavirus lockdowns, said Federico Mennella, managing director and co-head of the global chemical and materials practice at Rothschild & Co.

“For companies of a size where a robust, broad auction would require syndicated financing, we’ve seen a lot of those processes not surprisingly go on hold,” said Ruf.

However, companies are now looking ahead, moving beyond drawing down revolving credit facilities for liquidity needs, he noted.

“One difference between the past crisis and today is that liquidity seems to be available. People have cash and are [able] to find sources of liquidity,” said Mennella.

With immediate liquidity concerns largely on the back burner, that then leaves room for forward strategic thinking regarding M&A.

“Not surprisingly, we’re seeing a number of corporates look at what they want to do in H2 2020 and H1 2021 from a portfolio clean-up perspective, and they’re also very active in looking at what they want to do from an acquisition standpoint,” said Ruf.

Companies may find good opportunities to acquire businesses with strategic synergies for 1-1.5 turns [multiples on earnings before interest, tax, depreciation and amortisation (EBITDA)] less and on softer EBITDA levels than in previous years, said the banker.

Private equity firms have also transitioned from having alternative investment-type conversations – such as taking a minority stake or providing financing – during the crisis to preparing to approach targets for full buyouts, he noted.

“You have a lot of parties in the starting blocks – ready, loosened up and prepared to launch,” said Ruf.

Corporates will continue to do smaller tuck-ins or bolt-on deals but are likely to avoid large visionary or transformative deals, he noted.

Yet chemical companies still have to explain to investors “whether they are in good enough shape” to make acquisitions. “The hurdle is higher than it was before,” said Mennella.

Meanwhile, private equity firms have plenty of funds, but are still constrained by availability and cost of financing, especially for smaller deals, he noted.

INFRASTRUCTURE DEALS
As they review portfolios, chemical companies have an opportunity to monetise non-revenue generating infrastructure assets, noted Mennella.

“Selling or monetising assets from plants to infrastructure is a business that is growing… We also see different actors playing a role. We’re seeing asset managers or sovereign funds making investments in chemical companies, and they see that as a way to… [potentially] monetise their real assets,” said Mennella.

On 8 June, Brookfield Asset Management announced a stake in Canada-based propane distributor and chlor-alkali specialty chemicals producer Superior Plus through the purchase of around $260m in convertible preferred stock.

“The highest and best use of these assets… are by people that are involved in this and can manage them. Logistics are a very interesting part of the chemicals space, and one of the things we’ve seen in this pandemic is that the logistics chain is going to be re-thought,” noted Mennella.

Thus, players in the logistics space are likely to seek a more active role in this transition and potentially make more investments in logistics infrastructure, said the banker.

The shift in companies’ logistics strategies towards more diverse supply chains and away from deep single-region exposure in the aftermath of the coronavirus lockdowns could open up opportunities, said Ruf.

On 28 May, Dow CEO Jim Fitterling said the company is open to deals involving its infrastructure if it can find the right buyer. Such a company could be a global infrastructure firm, he noted.

Earlier there had been reports that Dow was considering selling its Gulf Coast ports and six railway hubs.

“This is a win-win scenario. We would be open to a best-owner mindset on assets like that where it makes sense,” Fitterling said in a virtual fireside chat hosted by Bernstein analyst Jonas Oxgaard.

“Any time an asset-intensive industry such as commodity chemicals has an opportunity to lighten some of the load from the asset intensity, there’s merit to that, especially if those assets could somehow redeployed in terms of filling up the load on those assets,” said Ruf.

Infrastructure funds also tend to have a lower cost of capital than chemical companies, offering the opportunity to earn better returns on those assets, he added.

ACTIVISTS TO RETURN?
Activist investors have largely been quiet in chemicals during the pandemic but may be poised for a comeback.

“I’m convinced that more activists are going to be looking at this space… The fact that you haven’t seen [as many] activists now, doesn’t mean they’re not patiently looking at things,” said Mennella.

It may be viewed as “bad form” to be attacking company management during a pandemic. Plus, there has been little visibility on earnings, making valuations difficult to gauge, he added.

Company managements clearly view activist investors as a threat, especially with stock prices having plummeted in March and April.

“Just the very fact that the number of ‘poison pills’ being adopted after the first two months of the year has been a magnitude higher than before, shows people are concerned about it,” said Mennella.

“I do think that chemicals is an industry where there’s a lot of activity that can be done for an activist – selling assets or changing the board,” he added.

On 4 June, activist investor Starboard Value took control over US-based construction chemicals company GCP Applied Technologies’ board in a proxy contest.

There are still a number of smaller publicly traded chemical companies, and some that are trading well below their 52-week highs despite the recovery in the sector and the overall stock market, Mennella noted.

With activists being active in chemicals for around a decade already, many company managements are already proactive in making portfolio and shareholder friendly moves.

“I’ve seen boards and management teams almost uniformly become much more proactive about portfolio focus. So it’s interesting to think of where activists go from here,” said Ruf.

Plus, the returns on investment from portfolio realignment by activists have not clearly demonstrated success, he noted.

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Focus article by Joseph Chang

Additional reporting by Al Greenwood