INSIGHT: Chem M&A outlook brightens amid surge of deal announcements

HOUSTON (ICIS)–Chemical companies have started the first half of 2024 announcing potential sales and separations of several businesses, which could lead up to busy cycle for mergers and acquisitions (M&A).

• Sustainability continues to influence M&A decisions, although it will unlikely lead to any large acquisitions.
• Private equity firms could play a larger role in M&A despite higher interest rates because financial investors have plenty of money.
• Electronic materials could be another M&A trend because of government incentives for the semiconductor industry.

CHEMS EXPECT MORE M&A
More than half of the chemical executives who participated in a survey expect M&A activity to increase in the next 12-18 months, according to Kearney, a consulting firm that conducts an annual report about deal-making in the industry. By contrast, 18% expect M&A activity to decrease, and 32% expect activity to be roughly stable.

The sentiment is more positive than surveys from the past few years, said Andy Walberer, partner and global chemicals lead at global strategy and management consultancy Kearney. He made his comments while discussing Kearney’s recent M&A report.

Part of that optimism comes from the divestment plans and strategic reviews recently announced by chemical companies, he said. Also, executives at chemical companies are no longer contending with the COVID-19 pandemic and the subsequent supply-chain disruptions.

They have the headspace to think about medium- and long-term strategy, he said.

SUSTAINABILITY CONTINUES INFLUENCING DEALS
Sustainability will unlikely lead to high-dollar deals, but it will still be a noteworthy trend, Walberer said.

Chemical companies are scrambling to secure supplies of recycled and renewable feedstock. Chemical executives and Kearney have noted the gap between supply and demand for sustainable feedstock.

To secure feedstock, companies have been establishing partnerships or acquiring businesses.

Walberer expects that trend to continue.

In other cases, chemical companies are making sustainability M&A decisions in response to government incentives and regulations, Walberer said.

Kearney has seen some companies divest sections of portfolios because of high carbon emissions, Walberer said.

PRIVATE EQUITY HAS PLENTY OF DRY POWDER
Higher interest rates have made M&A more challenging for private equity firms because of their traditional reliance on debt-financed acquisitions.

That said, private equity firms have built up large stashes of dry powder. They could put that money to work without debt, which has become more expensive because of higher interest rates.

At the same time, chemical valuations have fallen.

“We see PE very active,” Walberer said.

Walberer noted that financial investors made up 26% of chemical deals in 2023, up from 7% in 2022 and above the historic range of 15-20%.

In particular, private equity firms may acquire some of the infrastructure assets that chemical companies are eager to divest.

Dow had expressed interest in selling more of its infrastructure after agreeing to divest its rail assets at six sites in mid-2020.

Recent and upcoming carveouts could provide private equity firms with more M&A opportunities.

In December 2023, Solvay carved out its specialty business, called Syensqo, from its mostly commodity business.

DuPont expects to complete its breakup into three companies in the next 18-24 months.

CHANGING OUTLOOK FOR EUROPE
European chemical M&A experienced a slowdown because of the spike in energy and feedstock costs that followed the start of the war in Ukraine, according to the Kearney report. It should continue declining in the next 12-18 months before a possible rebound.

“Amid ongoing challenges, big chemical players are under stress, prompting them to review their business models and restructure,” Kearney said in a report regarding Europe.

In some cases, the owner of a business may decide to put it on the market after realizing it is no longer a core part of the company, Walberer said. The corporation concludes that it is no longer the best owner of the business and decides to divest it.

“There are a lot of good examples of how new owners have been able to improve the performance of the business,” he said.

DuPont’s performance coatings business would later flourish as Axalta Coatings Systems. which was initially sold to Carlyle for $4.9 billion before becoming a publicly traded company.

Another example is Nouryon, the surfactants business that was spun off from AkzoNobel.

In other cases, the business’s performance has suffered because of structural reasons, such as high costs, Walberer said.

GOVERNMENT SEMICONDUCTOR INCENTIVES MAY DRIVE M&A
Electronic materials could become another M&A trend because of the incentives being lavished by government, Walberer said.

The US, China, the EU, Japan, Germany and South Korea are among the countries that created semiconductor incentive programs worth billions of dollars.

DuPont’s electronics business is one of the three that will break out of the company. That business itself is the product of acquisitions made by DuPont.

CHEM M&A ACTIVITY OVER THE YEARS
Typically, the value of chemical M&A is $100 billion to $120 billion per year, a level it reached in 2022 and 2023, Walberer said.

The COVID pandemic and its subsequent recovery distorted M&A in 2020 and 2021. Values in 2019 and 2016 spiked because of large deals such as the Dow and DuPont merger and Aramco acquiring a large stake in SABIC.

ANNOUNCEMENTS IN 2024
The following lists some of the major chemical M&A announcements made so far in 2024.

• February 26: PPG explores strategic alternatives for its architectural coatings business in the US and Canada. It could reach a decision by the end of the third quarter.
• March 4: Evonik agrees to sell its superabsorbents business to International Investors Group (ICIG).
• March 13: Trinseo seeks to sell its stake in Americas Styrenics. It later clarified that the entire joint venture is for sale.
• May 6: BASF plans to sell its idled ammonia, methanol and melamine units in Ludwigshafen, Germany.
• May 8: LyondellBasell starts strategic review of the bulk of its operations in Europe.
• May 8: Shell agrees to sell its refinery and petrochemical assets in Singapore to the CAPGC joint venture.
• May 22: DuPont plans to break up into three companies, including one focusing on electronics and another on water.

Insight article by Al Greenwood

Thumbnail image by ICIS.