Chemical Industry M&A 2019

3 April 2019

The world is ever changing, and nowhere more so than in the chemicals industry. Technological developments, new products and processes, new regulations, and even new companies, the chemical industry of the future will be a very different place.

As SAP CEO Bill McDermott, noted at the recent SAPPHIRE NOW conference, “the pace of change has never been faster – and it will never be this slow again.”

A big influence on the changing face of the chemical industry is the sphere of mergers and acquisitions. Where once stood ICI, Allied Chemical, AkzoNobel, and AGFA, now stand Corteva, Nouryon, and Covestro.

With these changes influencing chemical company strategy, much time and energy is spent by experts predicting future mergers and acquisitions. Given that every year the value of chemical industry mergers is more than $200 billion then it is time and energy well spent.

So, what do chemical industry analysts foresee for 2019?

Deloitte’s 2019 Global Chemical Industry Mergers and Acquisitions Outlook, observes that there were lower trading volumes, “… by private equity investors in 2017 compared with the 2015-2016 period. While this volume continued to decline in 2018, the value of these transactions increased significantly due to the Nouryon deal [when the Carlyle Group and GIC bought out AkzoNobel].” As a result, Delloitte predicts that, “private equity will continue to play a role in the M&A market in 2019. If valuations remain high, private equity will continue to team with other bidders, perform roll-ups, or make bolt-on acquisitions.”

This outcome is a point highlighted by chemical industry consultants at EY, who state in their report of Dec 2018, that “The growing sway of private capital is creating new possibilities for deals. Activists and private equity (PE) groups have raised record amounts of dry powder, which means greater competition for outright acquisitions. As a result, we expect to see more innovative financing partnerships between private investment groups and businesses in the year ahead, especially around divestitures. It also will mean more large deals. 2018 has seen the most deals in the US$5 billion and US$10 billion range on record. As the market corrects and PE firms seek to deploy their capital, we anticipate seeing this trend continue.

The belief in this trend is based on the research they conducted, which found that 74% of American executives see the US M&A market improving. Additionally, 51% of executives expect to pursue acquisitions over the next year.

This expectant surge of activity is perhaps in part to offset the slightly quieter 2018 which many chemical industry sectors experienced.

One such slower sector in 2018, was in agrichemicals, where Deloitte reports that, “M&A activity in the sector was driven largely by portfolio reshuffling as a result of the mega-deals of previous years. This meant smaller, more precise moves, such as product line divestitures.” Adding that, “Trade disputes, particularly between the US and China, have had a negative impact on agricultural commodity prices.”

This leaves Deloitte to predict that, “With these challenges facing the sector, M&A activity in 2019 will likely continue to target smaller, more focused portfolio rebalancing. Mega-deals of the size we saw in 2015 and 2016 are unlikely. Activity in 2019 and beyond may skew toward fertilizers rather than agricultural chemicals, where significant rebalancing and consolidation is approaching the endgame.”

Similarly, slow activity was seen in the commodity chemical segment, where, “As measured by volume, deal activity … dropped 10 percent in 2018 from 2017, when volumes had reached their highest level since 2010.”

This has been blamed on the Chinese government’s new restrictions on outbound capital as well as the general slowing down of the Chinese economy.

Another area experiencing a period of reduced deals was the sector for intermediates and specialty chemicals, where, “M&A deal volumes … declined for the second year in a row.” That said, “Despite the decrease in deal volumes, deal value in the sector increased to levels not seen since 2014. This, thanks in part, to five transactions exceeding US$1 billion in value, including Carlyle Group and GIC’s US$12.5-billion acquisition of AkzoNobel’s specialty chemicals business, Nouryon, and IFF’s US$7.1 billion acquisition of Frutarom Industries.”

2018 was also a quiet year in the industrial gas sector, with the exception of the two large deals that emerged from the Praxair/Linde merger.

In general, despite the reduced activity in a number of sectors in 2018, and economic uncertainty on a global level (trade tensions, Brexit, slower Chinese economy, rising interest rates), Deloitte still predicts that 2019 will see a, “… robust market for M&A in the global chemical industry.” Particularly as, “The past demonstrates that M&A in the chemical industry can flourish, even in uncertain times.”

These are sentiments supported by consultants at NetatWork, who in their assessment of the 2019 Trends in the Chemical Industry, state that “Merger and acquisition activity in the U.S. is growing rapidly. With companies spending more as they see increased cash levels, M&A is still the primary focus of those funds. Moreover, this is expected to continue.”

The consultants at EY concur, although with caution, asserting that, “We expect a robust mergers and acquisitions environment in 2019, but remain cognizant of increased global tension. From the rise of tariffs and protectionism to evolving international alliances, the shifting geopolitical chessboard is affecting how US companies define their strategic priorities, both near and long term.”

But while mergers and acquisitions have for so long been the catalyst of change in the chemical industry. Maybe this too will change in the coming years. Digitalization, globalization, and technology breakthroughs such a nanotech, are changing the world order, and this may well result in an end to the ‘economies of scale’ thinking of bigger is better, instead flexibility may become key.

As strategic consultants at PWC note, “The chemical industry may finally be approaching a tipping point, prodded by accelerating technology advances, which are shaping customer purchases and needs, some chemicals companies have begun to rethink their growth strategies, finally moving away from cost-cutting and retrenchment, toward more nimble, coherent, and aggressive business models.”

All change, please, all change.


Photo credit: Deloitte, Imaa, M&ACritique, Wbscd, SPOTCHEMI, FiberMarine, & Corporateeurope