16:10 PM | January 4, 2021 | Vincent Valk
Chemicals deals are back, and in truth they hardly even went away. While activity did pause when the COVID-19 pandemic broke out around the world in the spring, the market rebounded strongly over the summer and is now primed for a robust 2021. Fueled by cheap debt—the US Federal Reserve has held interest rates near zero since March—along with strong equity markets and a mountain of private equity cash, bankers say activity will be strong in 2021.
The brief COVID-19 pause can clearly be seen by tracking transaction numbers (table). For the second-quarter of 2020, which includes the trough of April and May, M&A was down 32.3% year-on-year (YOY) from 2019, according to CW data. Third-quarter activity looks more normal, although there was still a substantial YOY decline as the third-quarter of 2019 was unusually busy. However, as of 14 December, the fourth-quarter of 2020 was nearly even with the year-ago quarter, implying that quarterly deal volume is likely to rise on a YOY basis.
This momentum looks set to carry over into 2021. “There is a lot of pent-up demand from when things stalled back in March, April,” says Telly Zachariades, managing director with The Valence Group of Piper Sandler. “It’s all systems go … and it’s going to continue into next year.”
The first ingredient in this mix is cheap debt. Bankers say that debt is now in many cases cheaper than it was before the pandemic, as central banks around the world have primed the pump with liquidity. This, of course, has benefitted private equity buyers, who have lots of cash to invest and did over-equitize some transactions earlier in the year. Private equity buyers “have a full capacity to pay,” says David Ruf, managing director and head of chemicals with KeyBanc Capital Markets (New York, New York). “We are seeing some transactions at pre-pandemic leverage levels.”
“The pent-up demand and lack of investment that occurred in 2020 from a private-equity point of view probably will make them a bit more aggressive,” Zachariades says.
Private equity firms have also, over the past several years, adopted a more strategic approach to chemicals transactions, looking beyond cash flow considerations to operational and market expertise. This trend continued through the pandemic, and with firms having sat on the sidelines for months, they are actively looking for chemicals investments. “Private equity needs to understand a business at a strategic level to justify paying premium prices,” Ruf says. “I’m seeing them compete with strategic buyers.”
For strategic buyers, the process of cost-cutting and business evaluation that accompanied the pandemic has helped clarify what businesses are—and are not—core operations. “You’re not going to pull resources from prize assets unless you really have to,” says Kevin Yttre, president and managing director with Grace Matthews (Milwaukee, Wisconsin). The simple act of making those decisions forces companies to consider where investment should and should not be allocated, and those impressions remain even after the crisis passes, he adds. “After you’ve weathered the storm, you tend not to push resources back into the businesses that aren’t really core,” Yttre says.
This process has reinforced a portfolio management concept that had become the norm in the industry even before the pandemic, often as a result of activist investors agitation at major chemical companies. “COVID-19 was another variant of the same impetus,” Ruf says. “So for a few months, you were focused on survival and you think very carefully about what you really care about. And for things that don’t fall into that category … you’ll ask if you’re the right owner for the business.”
EBIT multiples, meanwhile, have held up relatively well this year, although bankers say there is likely some selection bias at play. The transactions that closed this year were often viewed as high-quality assets, and often in sectors that rebounded strongly from the pandemic, or even saw demand surge as a result of it. “The multiples are strong because the better, more resilient business are the ones that came to market first post-COVID,” says David Bradley, vice chairman and global co-head of industrials with Jefferies (New York, New York). “But for the next wave … we’re seeing more assets that don’t quite have that resilience or quality.”
The outlook is strong for most end markets and geographies, according to Zachariades. “Most end markets have recovered pretty well,” with some notable exceptions such as aerospace, he says. “There is a lot going on right now, and it’s not particularly limited to any one subsector or geography. It’s pretty widespread and surprisingly buoyant.”
The US presidential election did not appear to have much impact on the M&A market. If anything, the prospect of a divided government and a more-predictable administration may have calmed investors somewhat. “The market has kind of ignored the election, unlike prior Presidential elections where it usually pauses,” Ruf notes.
One area that may be a focus for the new administration is climate change—which underscores the way in which environment, social, and governance (ESG) have come to the fore in industry this year. The pandemic has bolstered this ESG trend, according to Bradley. “It’s here to stay and it’s accelerating,” he says. “If you look at the consumer products companies, they are going green at a faster rate.” Assets with a sustainability angle, such as in biodegradable plastics or green chemicals, are seeing strong interest, a trend that looks highly likely to gain steam in the years ahead, Bradley says.
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