INSIGHT: Energy, ESG, supply chains weigh on chemicals M&A valuations

COLORADO SPRINGS (ICIS)–Chemical companies are changing how they value acquisition and divestment targets to take into account higher energy costs, snarled supply chains and sustainability.

• Investors are calculating the future cost of lowering business’s emissions
• Companies may buy and sell assets to respond to more regional markets
• New conditions may reveal perils of specialisation

ESG
Chemical companies are looking for businesses that will improve their environment, social and governance (ESG) profile, said DK Agarwal, CEO of Indorama Ventures. Agarwal was one of the speakers at a panel hosted by the consultancy Accenture at the annual meeting of the American Chemistry Council (ACC).

In an interview with ICIS, Trinseo CEO Frank Bozich said sustainability is one of the criteria that his company will consider in pursuing mergers and acquisitions (M&A).

Trinseo could even add value to a business that emits large amounts of greenhouse gases if it could lower those emissions at a reasonable cost, Bozich said.

That dynamic could allow sellers to find willing buyers for carbon-intensive businesses.

At the least, companies have been shedding carbon-intensive businesses that reduce their greenhouse gas emissions much more than their earnings before interest, tax, depreciation and amortisation (EBITDA), according to a study that Accenture presented at the panel. The study reviewed 10 years’ worth of chemicals M&A.

On average, a group of 10 deals lowered the sellers’ emissions by 27% and their EBITDA by 15%, according to the Accenture study.

In an earlier interview with ICIS, Accenture global chemicals lead Bernd Elser said companies may consider a sale if the cost of bringing a business to net zero would be too high. They could find better ways to spend the money.

That cost is measurable. If the value of an asset is based on free cash flow, then the cost to reduce a business’s emissions could affect the value of the asset.

Investors are now factoring in the future investments needed to lower greenhouse gases and the effect those investments will have on free cash flow, Elser said.

Nonetheless, chemical companies cannot ignore the role that innovation and new technology will play in reducing carbon intensity, said Harald Schwager, deputy chairman of Evonik’s executive board. Schwager was another panel speaker.

Acquiring a new business does not necessarily bring a company closer to net zero, he said.

HIGH ENERGY
European chemical companies survived the previous bout of high prices through M&A and restructuring their assets to create larger integrated sites, Schwager said.

This will happen again in the current climate of high energy prices, Schwager said.

He expects markets to become more regional. Higher energy costs also make logistics more expensive. A more volatile geopolitical climate also favours regional markets.

Companies will redefine the scope of a regional plant and a world-scale plant, Schwager said. Those new definitions will influence their M&A strategies.

Celanese CEO Lori Ryerkerk noted that when energy prices were lower, chemical companies were rewarded by becoming more specialised. They shed non-core businesses, increasing the supply of acquisition targets for other chemical companies and private equity firms.

THE STATE OF CHEMICALS M&A
If one excludes high-dollar deals, the value of total chemical M&A has remained roughly steady during the past 10 years, at $75bn-95bn, according to the Accenture study.

That is a lot of buying and selling, so a change in the criteria that companies use to value businesses will have a large effect in terms of money changing hands.

When companies buy and sell businesses, they usually do so within their geographic regions, the study said. North American companies tend to buy business from other North American companies. The same goes for Europe, China, Japan and South Korea, and the Middle East and Africa.

Ryerkerk attributes this to familiarity and taxes, which allow buyers to lower the risk of their acquisitions.

Private equity plays a large and active role in chemicals M&A, accounting for about 20% – or $16bn-23bn/year – of all chemicals deals, the study said. By the time private-equity firms sell their businesses, they tend to create a lot of value.

Low interest rates made it easier for private-equity firms to finance their acquisitions through debt. Now that central banks are raising interest rates to fight inflation, the cost of money will increase, making debt-financed acquisitions more expensive.

The uncertain outlook for the global economy could further discourage private-equity firms from acquiring businesses, Ryerkerk said.

PERILS OF SPECIALISATION
When energy prices were low 10 years ago, chemical companies did not earn a premium from owning feedstocks or being part of a much larger oil and gas producer. Supply chains were fluid and critical raw materials could arrive at plants within days.

Companies created value by selling assets that were at opposite ends of their core business and acquiring assets that were similar to it. This allowed companies to specialise, extract synergies and achieve economies of scale.

Now, supply chains are choked because of COVID and labour shortages. Supply chains are fragile and price gaps between regions are huge.

Some companies have resorted to delivering materials by air because marine shipments are too slow.

Specialistion could leave companies more vulnerable to future supply-chain disruptions.

Retired US General Stanley McChrystal revealed a sombre outlook of a world at war during his keynote address at the ACC Annual Meeting. The choice of a general at the event is striking and illustrates the role geopolitics will play in the chemical industry.

McChrystal said the war between Russia and Ukraine ended the era of globlisation, and it will not return for at least 20-30 years.

Markets will become more regional, increasing costs and reducing efficiency, he said.

The ACC Annual Meeting ran from Monday through Wednesday.

Insight by Al Greenwood