23:33 PM | February 7, 2020 | Vincent Valk
The trajectory of chemical M&A volumes and values diverged during the fourth-quarter of 2019. On a year-on-year (YOY) basis, M&A volumes were down by 7.1%, to 65 transactions, while values more than tripled, from $16.5 billion to $54.0 billion, according to CW data. The value figure was boosted by the $26.2-billion acquisition of DuPont’s nutrition and biosciences (N&B) business by IFF, which was the second-largest transaction announced in 2019. Excluding that deal, the YOY increase in deal values was not quite as dramatic – values rose by 68.4%, to about $27.8 billion.
On a sequential basis, the trajectory was similar. Volumes were down by 35.0% from a rather active third-quarter of 2019, when 100 new transactions were announced. Values, meanwhile, rose 36.4% sequentially from $39.6 billion in the third quarter. Excluding the DuPont N&B-IFF deal, however, M&A deal values fell by 29.8% sequentially.
Overall, 2019 was a good year for chemicals M&A. Announced transaction volumes rose 3.9% YOY, to 293, while announced values soared, to $211.5 billion from $88.7 billion in 2018. It was the largest deal-value figure since 2016, when $240.6 billion worth of chemicals M&A was announced. EBITDA multiples were up, as well, although a handful of deals, including DuPont N&B-IFF boosted that figure. “I have the sense that valuations have been at the high end,” says Mukta Sharma, managing director/chemical consulting at IHS Markit.
The dramatic rise in the dollar value of announced M&A transactions points to the return of the megadeal in 2019. Three transactions – DuPont N&B’s acquisition of IFF, Sabic’s acquisition of Aramco, and Sabic’s acquisition of a minority stake in Reliance – were larger than the largest announced deal in 2018. The $69.1-billion Sabic-Aramco deal was the largest M&A transaction announced in the industry since DowDuPont in late 2015, a bit ahead of Bayer’s $63.5-billion acquisition of Monsanto, which was announced in 2016. Some 26 transactions valued at over $1 billion were announced in 2019, compared with 15 in 2018.
Portfolio management is a key driver. The DuPont N&B business was the highest-profile example of such a deal in 2019, but BASF, Clariant and Evonik also sold substantial assets. “There has been a continuation of portfolio shifts, leading to carve-outs and selective transactions,” Sharma says. “Many transactions have gone through auction processes, which suggests a good level of buyer interest.”
High valuations have created some difficulties, however. “As valuation multiples continued to climb, good assets being picked up and chemical companies turned conservative in anticipation of a recession, it becomes more difficult for buyers and sellers to reach a deal,” says Craig Kocak, US deals partner at PricewaterhouseCoopers (PwC; New York, New York), a consulting firm. This can be a particular issue for private equity firms, according to Kocak. “Additionally, at current valuation levels, it is very difficult for private equity buyers to simply make the deal work under the traditional leveraged buyout model,” he says. “Every buyer will need to focus on value creation opportunities in order to justify the multiple they pay.”
Private equity firms, which still have tremendous amounts of cash to deploy, appear dedicated to finding those opportunities despite the high prices. The number of transactions with a private equity buyer increased slightly in 2019, from 34 to 37. The total announced value of private equity acquisitions in chemicals also rose slightly, by 3.4% YOY, to $19.5 billion.
Divestiture activity was remarkably steady on a volume basis in 2019, with 34.5% of total announced transactions being divestures, a slight tick upwards from 34.0% in 2018. Divestiture values posted a bigger increase, up by 71.6% YOY, to $66.7 billion, although the increase was almost entirely due to the DuPont N&B-IFF deal.
Nine divestitures valued at over $1 billion were announced in 2019. Ecolab, Bayer and Huntsman sold or spun-off major assets, in addition to DuPont, BASF, Clariant and Evonik.
Tax-advantaged deal structures, such as Reverse Morris Trusts (RMTs), are becoming increasingly common in such deals. RMTs allow a company to spin off a unit and then merge it with another entity, thus avoiding the taxes associated with ordinary mergers. The DuPont N&B divestiture was an RMT transaction, as was Ecolab’s merger of its upstream oil and gas chemicals business with energy services firm Apergy (The Woodlands, Texas).
Big portfolio shifts look set to continue in 2020. In January, ChemChina and Sinochem agree to merge their ag assets into a new company, called The Syngneta Group, that will become the world’s largest agchems maker by revenue. Rumors also continue to swirl around DuPont, with the latest asset reportedly up for sale being the company’s electronic chemicals unit. Some analysts continue to believe that a break-up of the company is possible, a move that DuPont executive chair Ed Breen has not ruled out.
Uncertainty has not abated, either, and has arguably increased. While recession fears have eased somewhat, at least in the US, the European economy remains slow and coronavirus has created ample downside risk in China. Considering the risks, “it would be natural for some caution and extra focus on due diligence and testing of downside scenarios,” Sharma says.