INSIGHT: Chemical M&A sets up for rebound in 2024 as deal backlog bursts at seams

NEW YORK (ICIS)–Following a horrendous 2023 with deal activity stymied by massive inventory destocking, weak demand, rising interest rates and tight capital markets, global chemical mergers and acquisitions (M&A) are setting up for a rebound in 2024. However, the magnitude of any recovery is still very much in question.

“The high level of geopolitical and business uncertainty, coupled with high interest rates, has made buyers and sellers uncertain about whether to buy or sell,” said Peter Young, president and managing director of investment bank Young & Partners.

“M&A activity in 2024 is hard to forecast, but it will be driven by a couple of narrow strategic themes of chemical companies and some increases in private equity activity,” he added.

• Big backlog of deals that sellers held off on in 2023 should come to market in 2024 as market conditions expected to improve.
• Private equity to be active on both the sell side and the buy side as financing markets loosen up.
• North America and the US increasingly attractive for acquisitions on key advantages while Europe deals will be more challenged.
• Specialty chemical assets and those with ESG friendly characteristics in demand.
• Opportunistic investors to face less competition for non-ESG assets.
• Middle East and southeast Asia oil majors to be active acquirors, especially for assets with a clear sustainability angle.

The high volatility of earnings in the past several years – strong in 2021 and H1 2022, and weakening from H2 2022 through all of 2023, has also made it difficult to gauge the level of normalized earnings going forward, and therefore proper valuations for assets.

“The search for normalized earnings is ongoing, and that just leads to a lack of confidence in projections, which leads to a lack of a conviction and buyers being more cautious,” said Leland Harrs, managing director at investment bank Houlihan Lokey.

“Sellers are not achieving the valuations they desire, and buyers aren’t confident paying those valuations. So there’s a standoff between sellers and buyers, and the pipeline or backlog of deals is expanding, particularly if you look at private equity holding onto assets waiting for the recovery,” he added.

PRIVATE EQUITY TO EXIT LONG-HELD ASSETS
While buyers and sellers indeed are cautious early in 2024, lower expected interest rates and easing of financing markets combined with a stabilization or rebound in business activity should open the window for a greater number of assets to come to market, especially from private equity firms that put many processes on hold last year.

“Many parties that were looking to monetize businesses, be it private equity, corporates with carve-outs or privately held companies, held off for 2023. Some of these assets have been held now for 12-plus months longer than otherwise expected, and so there will be some impetus to go ahead and take advantage of a more normalizing market in 2024,” said David Ruf, managing director at investment bank KeyBanc Capital Markets.

“Stemming from the lack of businesses available in the last 12 months, there is also a lot of demand from people who have not purchased things during that time. So there’s demand both from the buy side and the sell side to see transaction volumes grow,” he added.

Ultimately, whether a deal gets done will come down to recent historical performance of the business for sale, and the visibility on performance in the next year or so, the banker pointed out.

“From a business performance perspective, H2 2023 was impacted by the effects of destocking, soft demand or price normalization.  But now we’re seeing more confidence that recent performance is building into visibility for the coming year,” said Ruf.

Chemical assets owned by private equity that could hit the market in 2024 include Germany-based ASK Chemicals (Rhone Capital), Netherlands-based Stahl (ONG/WENDEL, Carlyle Group) and Germany-based United Initiators (Equistone Partners), according to sources in the financial community.

“We are cautiously optimistic. In our view, there are a number of aging assets in private equity portfolios in the 4-6 years range, and we think many of them are going to come to market – partly because a particular fund may be coming to an end and partly because many private equity firms are raising new funds and need to monetize their investments and return cash to investors,” said Federico Mennella, managing director and US head of chemicals at investment bank DC Advisory, a unit of Daiwa Securities.

“We have seen more pitches and more teasers coming out in recent weeks. Processes that were put on hold in the past year may be coming back to life,” he added.

Concerns about the availability of debt financing and a potential recession, especially in the US, are diminishing.

“While last year people were simply not transacting, now that there is at least some visibility into 2024, people are beginning to make plans. This year a combination of factors should result in more assets on the market and more robust processes,” said Mennella.

Signs that a business for sale has turned the corner or a strong case for it to perform well over the coming years would be conducive to a sale.

“Private equity will look to exit businesses this year, but they will need to do this in a fairly calculated manner. How the businesses have performed over the last 12-24 months will be a significant factor,” said Ariel Levin, managing director and global co-head of chemicals investment banking at Piper Sandler.

“However, if private equity doesn’t need to sell the business, the answer may be to wait and make sure that performance is really on track before it exits. A pick-up of private equity divestitures will probably be a little bit slower to kick start. But that’s definitely something we expect to happen during the course of 2024,” he added.

In the past, cheap debt made many deals much easier to do, but this is no longer available today and perhaps for years to come, noted Harrs from Houlihan Lokey.

“It takes these marginal deals and highlights just how marginal they are. We’ve seen many of these kinds of deals getting pulled from processes, but they will have to come out eventually. Yet capital is expensive and so the math is going to lead to lower valuations as well,” said Harrs.

The last decade from 2010-2020 was characterized by loosening financing markets where many investments performed well. Earnings and valuations, rose with private equity investors often benefiting from both.

“Now the quality is more important. The good investors will make money now in challenging cyclical times,” said Bernd Schneider, managing director and global co-head of chemicals at investment bank Stifel.

Deal flow is set to increase in the coming year because of the necessity to exit on the part of both private equity and corporates.

“Corporates that need to restructure, particularly in Europe, are not driven by the marginal cost of debt to make a strategic decision to exit,” said Harrs.

“The expectation is that this dam will have to break. But I don’t know if it’s going to break in a flood or start as a trickle,” he added.

The banker is starting to see early signs of this happening, boding well for a more active 2024.

“As things settle out, people are more comfortable with interest rates and have a constructive view on future easing by the Fed. Inflation appears under control and results should come in at a more normalized level. Confidence, which is a function of all these things, should increase, which is the ultimate determinant of activity,” said Harrs.

DIVESTING NON-ESG FRIENDLY ASSETS
More corporates are preparing to divest non-core and especially non-ESG friendly assets in what they hope will be an improved M&A market.

“We see increasing activity in preparations for 2024 for new divestments, especially carve-outs from western multinationals and particularly those in Europe,” said Schneider from Stifel.

These assets comprise, among others, fossil value chains for which there are often no clear touchpoints to the trends of sustainability and decarbonization, he added.

“As the world is transitioning into a sustainable world of chemicals, there is increasing pressure from shareholders. That’s where we see most of the of the activity,” he pointed out.

So who will be the buyers of these non-ESG assets that so many publicly traded Western companies are seeking to jettison?

“It’s going to be very difficult for public companies to buy ESG-negative businesses. So it’s going to be private equity or what I call ‘truly private’ equity in the sense of family offices or funds where exit is less of a factor when considering buying businesses,” said Levin from Piper Sandler.

“Then there’s also a buyer universe that sits outside of Europe and North America. There is naturally still a lower sensitivity to ESG when you think about markets in India and China, and more developing markets,” he added.

There has been increasing activity in one non-ESG sector in particular – oilfield chemicals.

In December 2023, Finland-based Kemira agreed to sell its oil and gas chemicals business to Sterling Specialty Chemicals, a US subsidiary of India-based Artek Group, for $280m. Sterling and Artek in 2020 bought out the oilfield chemicals business of Baker Hughes.

In April 2023, Switzerland-based Clariant completed the sale of its North American Land Oil business to India-based Dorf Ketal for $14.5m.

In February 2023, private equity firms Hastings Equity Partners and One Equity Partners merged their oilfield chemicals businesses Imperative Chemical Partners (Hastings Equity) and RSI Chemicals (One Equity), creating one of the largest oil and gas production chemicals businesses focused on the US onshore market.

“Some companies can be viewed as being unattractive because they focus on areas tied to old technologies, with products such as oil and gas chemicals, lubricants and additives which are being seen as impacted by the shift towards electric vehicles or not particularly ESG friendly,” said Mennella from DC Advisory.

“However, we are seeing some funds, family offices and companies that will make these opportunistic acquisitions,” he added.

It could be boom time for these opportunistic buyers – alternative asset firms as well as Asia-based conglomerates and other companies.

“Often no other listed multinational will want to pick it up because these listed companies all face pressure from their sustainability driven shareholders. But it will be a beautiful time for opportunistic investors that can pick up interesting companies for often an attractive entry price,” said Schneider from Stifel.

“Multiples have come down for sure on everything that is related to fossil raw materials or the fossil chain that don’t have a sustainability angle. If you can buy these and run them for cash flow, you’re making beautiful amounts of money in only a few years,” he added.

In many cases these non-ESG businesses should still be viable for the next 10+ years despite the trend towards sustainability, since there are often no renewable substitutes available, at least not at economically acceptable conditions.

“Now is the time for investors that are opportunistic – not sustainability driven,” said Schneider.

PE BUYER LANDSCAPE IMPROVES
On the buy side, private equity firms should see an improved financing market, giving them a chance to put more dry powder to work.

“In 2024, we expect activity to pick up. On the private equity side, the debt markets are fairly open right now. The Term B loan market is open, as is direct financing. Leverage is significantly less of an issue than it was for the majority of 2023,” said Levin from Piper Sandler.

“That coupled with private equity still looking to deploy lots of capital, we expect them to play quite a significant role in in 2024,” he added.

Capital is still relatively expensive, limiting the amount of leverage private equity can put on deals, but the expectation of the Fed beginning to cut rates will be seen as a positive economic and M&A indicator, said Ruf from KeyBanc.

“A couple of years ago, your debt limitation had more to do with leverage ratios – 6-7x EBITDA. But now your limitation is your fixed charge coverage ratio – the actual cash expense on your financing. And that has had an effect on deal valuations more broadly,” he explained.

Yet to the extent they can get deals done, private equity groups will continue building platforms in areas such as adhesives and coatings, ingredients and other specialized segments, said Mennella from DC Advisory.

“More private equity groups are looking at the chemical sector. In the past it was a smaller group – for example Arsenal, SK Capital, New Mountain and One Rock Capital. In contrast, today many more PE funds are active in the chemical space. They have ideas, connections, a lot of dry powder and want to grow in the space,” said Mennella.

For instance, Arsenal Capital Partners replicated the successful exit from its Royal Adhesives investment with the build-up of US-based Meridian Adhesives Group as a platform company through a series of acquisitions over four years, and sold Meridian to private equity firm American Securities in September 2022.

Since then, Meridian has made one acquisition shortly thereafter – that of Design Polymerics, a producer of high-performance sealants, adhesives, insulation mastics and indoor air quality products – in the same month.

“Companies who have successfully built a platform in the space will try and use the same playbook and do it over and over again,” said Mennella.

Other private equity firms that had been active on the chemicals buy side many years ago but that have been dormant recently may again look for opportunities in the sector in 2024.

In January 2024, Clayton, Dubilier & Rice (CD&R) brought on former Dow president and chief financial officer Howard Ungerleider as an Operating Advisor to work on new investment opportunities along with supporting relevant portfolio companies.

CD&R and BASF in November 2021 sold US-based water treatment chemicals company Solenis (CD&R 51%/BASF 49%) to Platinum Equity for $5.25bn. In 2015, CD&R and CVC Capital Partners took US-based chemical distributor Univar Solutions public via an IPO.

Private equity buyers will be on the other end of private equity exits, as well as on many corporate divestitures of non-core assets.

In November 2023, private equity firm TJC (formerly The Jordan Company) closed its acquisition of an 80.1% stake in DuPont’s polyacetal (POM) business Delrin, valuing the company at $1.8bn.

US INCREASINGLY ATTRACTIVE TARGET
In terms of where the action will be, North America and particularly the US, is becoming a key sought-out destination for deals. This has been driven by the reshoring trend, investment incentives, advantaged energy and raw materials, as well as geopolitical instability elsewhere in the world.

“Geographic realignment also is a driver for M&A. Companies that in the past focused on China and [Asia] as a just-in-time manufacturing and inventory partner have moved to onshore their business,” said Mennella from DC Advisory.

The most recent supply chain turmoil from attacks on shipping in the Red sea and elsewhere are likely to strengthen the onshoring, nearshoring and friend-shoring trends.

“Many chemical companies and private equity firms are looking at North America as a preferred destination for investments because of its structurally lower feedstock and raw material costs, better regulatory environment and increased cash flow opportunities,” said Mennella.

“In the past, you would focus mostly on the investment cost, infrastructure and labor when making investments. Now you have to look also at the raw materials, logistics, supply chain as well as the geopolitical risks and tax considerations. The US is benefiting from this,” he added.

In December 2023, South Korea-based Samyang Holdings acquired US-based personal care and industrial surfactants producer Verdant Specialty Solutions from private equity firm OpenGate Capital for around $250m.

“We’re seeing, a lot of interest in North American assets with trends toward reshoring and western manufacturing. People have a long-term positive outlook for the region and have learned from the inherent flaw created by placing such a large portion of manufacturing in a single geographic area,” said Ruf from KeyBanc.

Stimulus from the US Inflation Reduction Act (IRA) and other regulatory issues have also been very helpful for M&A in the country.

“People are focusing on ESG and circular economy themes. The demand for chemicals and materials that are needed to support the energy transition is expected to rise. There are manufacturing projects in EVs, batteries, clean energy and bio-manufacturing that will have an impact on chemicals, and therefore on attractiveness of certain assets,” said Mennella.

“Policies are also very relevant. For instance, 24 US states are now categorizing advanced recycling as manufacturing as opposed to waste management. As a result, those states have fewer environmental constraints and attract companies who profit from increased access to capital,” he added.

EUROPE DEALS MORE CHALLENGED
In contrast, structural challenges in Europe may continue to limit deal activity in the region, and also among Europe-based buyers.

“Buyers have been more cautious about jumping into the market, given that there are structural issues that remain in the European market related to energy and the Russia-Ukraine war which is still ongoing,” said Levin from Piper Sandler.

“Demand and the macro fundamentals affect everybody, but Europeans have been slightly more cautious in being proactive than buyers in North America,” he added.

European corporate buyers are mostly focusing on bolt-on acquisitions.

“Strategics are currently focused on harnessing down to what they define as their core businesses. They’re still doing acquisitions, but fewer ‘visionary’ breakouts into new categories and more along the lines of bolt-on size and center fairway,” said Ruf from KeyBanc.

In December 2024, France-based Arkema strengthened its construction adhesives business with the acquisition of Ireland-based Arc Building Products and finalized the buyout of Glenwood Private Equity’s 54% stake in South Korea-based PI Advanced Materials (PIAM) to bolster its offerings to the advanced electronics and electric mobility markets.

The Arc Building products deal was relatively small in size, while the PIAM deal valued the business at €728m and was characterized as a key component in Arkema’s transformation into a pure-play specialty materials company.

SPECIALTY ASSETS IN FAVOR
With commodity chemical assets, especially in non-feedstock advantaged regions, out of favor, most buyers are focusing on specialty chemical deals. With high demand and scarce supply, buyers will have to pay up for these assets.

“Depending on the business and the subsector, you see corporates continuing to be active in buying assets that are of significant strategic value to them,” said Levin from Piper Sandler.

In October 2023, Switzerland-based Clariant agreed to buy US-based IFF’s cosmetic ingredients business unit (Lucas Meyer Cosmetics) for $810m in a deal expected to close in Q1 2024. The valuation was 16.3x trailing 12-month earnings before interest, tax, depreciation and amortization (EBITDA) and over 8x sales.

“Whether it’s personal care, food ingredients, environmental services or water treatment, these will continue to be hot spots of the industry where there is clearly a view that they are higher growth, higher margin, more specialty and less volatile businesses,” said Levin.

“These businesses will always be a target for both strategics and private equity. And generally speaking, you’re going have less of them available,” he added.

Most recently, US-based PPG in January 2024 announced it will review strategic alternatives for its silica products business. Its precipitated silica is used in a wide range of applications, including food and feed, catalysts, rubber, CASE (coatings, adhesives and sealants), battery separators and synthetic paper.

Mega deals have been few and far between, but a highlight was US-based water treatment chemicals producer Solenis (owned by Platinum Equity) completing its $4.6bn acquisition of US-based hygiene, infection prevention and cleaning products company Diversey in July 2023.

Earlier in May 2023, the giant DSM-Firmenich merger finally closed after about a year in the making, creating a powerhouse in nutrition, health and beauty.

“Some companies are restructuring or rethinking their whole business model, diversifying into new areas. For example, Westlake has built a very impressive building products portfolio in addition to its petrochemical and polymers business, and DuPont has reengineered its entire portfolio via various transactions,” said Mennella from DC Advisory.

“Rethinking a company’s focus, re-engineering its business model, carving out and selling businesses will have cascading effects for the M&A market. That’s why we are cautiously optimistic,” he added.

COMMODITY DEALS STILL POSSIBLE
In 2023, deal valuations eroded slightly in specialty chemicals but collapsed in commodity chemicals, the latter a reflection of the severe cyclical downturn in the sector, said Young of Young & Partners.

Yet not all commodity chemical deals are dead. In December 2023, INEOS agreed to acquire LyondellBasell’s ethylene oxide (EO) and derivatives business, including the Bayport Underwood site in Texas, for $700m.

The deal, expected to close in Q2 2024, includes a 420,000 tonne/year EO plant, a 375,000 tonne/year ethylene glycols (EG) plant and a 165,000 tonne/year glycol ethers plant, together with associated third-party business at the Bayport Underwood site.

Access to cost advantaged energy, feedstocks and logistics networks was one of the key benefits cited by INEOS.

INEOS also in December 2023 closed its $490m acquisition of US-based Eastman’s Texas City site which includes a 600,000 tonne/year acetic acid plant. It highlighted access to “competitively priced feedstocks”.

Another commodity-type asset on the selling block is US-based tire producer Goodyear’s chemical business, as the company in November announced it will “actively pursue strategic alternatives” for the unit which includes four plants in the US – three in Texas and one in New York – that produce synthetic rubber and rubber additives.

Commodity chemical assets in Europe and parts of Asia will be more challenged in terms of finding buyers.

In January, Shell announced it expects to book $2.5bn-4.5bn in impairments in Q4, with its Singapore chemicals and refining assets it is seeking to divest accounting for $1.5bn-2.1bn of the total.

The Singapore assets earmarked for divestment include a 237,000 bbl/day refinery and a 1.15m tonne/year cracker, with a sale the preferred route for exit. Several China-based firms are reported to be among the bidders.

MIDDLE EAST, SE ASIA BUYERS
Among potential buyers, there is a new class of investors – primarily Middle East and southeast Asia players – that are seeking to “transform their wealth from oil and gas” into sustainability focused businesses such as renewable polymers, recycled plastics, flavors and fragrances, and specialty and functional coatings, said Schneider from Stifel.

“There are a number of buyers coming from the Middle East that can afford to pay interesting valuations. Some of those investors really have a very sustainable view of things. Only companies that are profitable, renewable or helping to reduce carbon footprint dramatically are really of interest,” he added.

Abu Dhabi National Oil Company (ADNOC) has been in discussions to acquire Germany-based diversified chemical company Covestro, which has intensified its sustainability focus in recent years.

“The interest of ADNOC in our company underlines our strong position as one of the world’s leading manufacturers of high-quality polymer materials and as a leader in the shift towards a circular economy,” said Covestro CEO Markus Steileman in September 2023 when the company announced it would enter into open-ended discussions with ADNOC.

In November 2023, ADNOC launched an offer to acquire Novonor’s stake in Brazil-based Braskem. Braskem, the sole polyolefins producer in Brazil with growing investments in bio-based and recycled polymers, is jointly owned by Novonor and state-owned oil and gas company Petrobras.

“There is a desire for Middle East corporates to diversify, and it will be important for them to find opportunities that really move the needle because they’re so large. You will absolutely continue to see them moving more downstream and further into specialties,” said Levin from Piper Sandler.

“The only unusual activity has been the [proposed] acquisitions by ADNOC. This is not typical of the overall market and is driven by strategic goals of Middle East players,” said Young of Young & Partners.

International oil companies (IOCs) in southeast Asia are also looking to diversify away from oil and gas, Schneider from Stifel pointed out.

PETRONAS Chemicals Group in October 2022 completed its landmark acquisition of Sweden-based sustainability-driven specialty chemicals company Perstorp for €2.3bn.

With all these factors, investment bankers are more optimistic about chemical M&A in 2024.

“There is an increasing appetite from Middle East and southeast Asia investors for renewable and decarbonization deals. Then at the same time, it’s also a pretty good time for opportunistic investors that see making money as their primary goal and sustainability perhaps only secondary,” said Schneider.

“With record volumes of funds still waiting to be deployed, numerous carve-outs divestments that are expected to come from western multinationals and many private equity assets that had been parked for exit already more than a year, 2024 should see significantly more chemicals deals than the previous year,” he added.

“All of these things are fuel for a pick-up that everyone expects will happen. The question is the timing. Things are starting to happen but it’s too early to call if its sustainable. However, it feels more dynamic and the conditions are better than a year ago, so I don’t expect a repeat of 2023,” said Harrs from Houlihan Lokey.

Additional reporting by Tom Brown, Fanny Zhang, Jonathan Lopez and Stefan Baumgarten

Insight article by Joseph Chang

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