Chemicals industry M&A deal values continue to rise, and A.T. Kearney's latest report finds that this is expected to continue. This report reviews recent deal trends in the industry and, based on a survey of leading chemicals and investment banking executives, provides an outlook for industry M&A in 2015.
A.T. Kearney’s latest Chemicals Executive M&A Report finds a continued increase in total deal value in 2014, even as transaction volume stayed close to flat. Deal value increased to $82 billion (from $72 billion in 2013), as buyers focused on core competencies and downstream integration.
The Chemicals Executive M&A Report analyzes merger and acquisition activity for the global chemicals industry from 2001 through 2014, and includes a look at trends for 2015.
Overall deal value increased as transaction volume stayed flat. Total deal value increased 13 percent in 2014 to $82 billion (from $72 billion in 2013). Total value was 67 percent higher than 2012 ($47 billion), but still remained below the 10-year average of $92 billion. The total number of transactions was almost unchanged at 1,035 (down 2 percent from 1,061 in 2013). While overall development appears to be stable, there has been significant structural change—especially the increasing role of activist investors and the steady rise of China as a major force in global M&A.
Focus on core competencies and downstream integration driving the market. The focus on core competencies and higher value-added products drove activity in the chemicals market in 2014, and companies divested businesses not seen as core, including BASF’s global textile business, AkzoNobel’s paper chemicals, and DSM’s composite resins. Companies made investments in attractive downstream segments such as Merck’s $2.9 billion acquisition of AZ Electronic Materials. This is expected to continue in 2015: In our survey of chemicals executives, 82 percent of respondents see divestitures driven by portfolio restructuring as a main driver of M&A in 2015.
Activist investors are on the rise. Activist investors are playing an increasingly important role in portfolio restructuring activities within chemicals, driving divestments in large chemicals companies with diversified portfolios, including Dow Chemical (Daniel Loeb), DuPont (Nelson Peltz), and Ashland (Barry Rosenstein).
In our survey, 55 percent of respondents expect activist investors to play a key role in M&A in 2015. While the focus has been on North American companies to date, we expect activists to increasingly focus on other regions, including chemicals companies in Europe, as a consequence of increasing fund sizes and a scarcity of underperforming assets. Activist investors will likely have to adapt their approach to the significantly different regulatory environment outside of the United States.
Private equity remains an important player. Financial investors were involved in some of the major deals in 2013, including Koch Industries and Goldman Sachs Capital’s acquisition of Flint Group (seller: CVC) and Eastman’s acquisition of Taminco (seller: Apollo). Their overall share of transactions remained at roughly 20 percent for the fourth consecutive year. Their focus however has shifted significantly toward specialty chemicals. While only one-third of companies acquired by financial investors in 2012 were active in specialty chemicals, the share in 2014 was 50 percent.
The East is rising—and the West is booming. Over the past 15 years, China has risen from being a minor player in chemicals M&A to becoming the second-largest market after the United States, with 19 percent of all chemicals M&A deals in 2014. However the vast majority of transactions are still domestic, as China’s fragmented chemicals industry consolidates. In addition to further domestic consolidation, players in mature markets are expected to pursue further investments in the critical Chinese market, and there will also be more outbound investments from local players.
The other hot market is North America. Not only is it the only mature market with an increasing share of global chemicals M&A activity, it is also seen as a key growth area for deal activity by two-thirds of the chemicals executives we surveyed.
Europe’s share of M&A volume continues to decline. European acquirers now represent 25 percent of global transactions, down from 45 percent in 2001. A key reason has been Russia, where political and financial uncertainty has driven transaction volume 60 percent below the 2011 peak. Our respondents predict a further decline in the M&A activity in Russia in 2015.
About the Survey
The survey was conducted among executives from leading chemicals industry firms and investment banks in December 2014 and January 2015. Participating companies were selected from Chemical Week's Billion-Dollar Club. Survey respondents, typically the heads of M&A departments of chemicals companies, discussed their expectations for future M&A market developments on a Likert-type scale.