chemicals m&a 2015-16files.ctctcdn.com/1716d75f001/7594f62b-ca81-4646-824f-16064461… · 2015...

IN THIS ISSUE

2015 Review & 2016 Outlook

Valuation Review

Sub-sector Performance & Valuations

Chemicals M&A 2016

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www.ValenceGroup.com

Chemicals M&A 2015-16

Highlights � Chemicals M&A hits an all-time high in 2015 and 2016 looks on

track to continue the trend

� Almost 60 large specialty chemicals transactions greater than $1bn in last five years and number of deals continues to increase

� Recent market volatility lowering chemical company trading multiples by c. 1x EBITDA while transaction multiples remain robust

� Trading multiples across food ingredients, pharma & agrochemical intermediates and flavours & fragrances continue to outperform

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The Valence Group acted as financial advisor to the

shareholders of Nubiola Group

has sold certain chlorvinyls businesses for INOVYN, their PVC JV to

The Valence Group acted as M&A advisor to INEOS and Solvay

The Valence Group acted as financial advisor to DSM

has sold its 65% interest in its Polymer Intermediates and Composite Resins

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The Valence Group acted as financial advisor to Arsenal Capital

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The Valence Group acted as financial advisor to Canexus

Chemicals M&A 2015 Review

2 | Chemicals M&A 2015 Review January 2013 www.ValenceGroup.com

2015 Review and 2016 Outlook

It would be difficult to review 2015 without acknowledging the recent turbulence in stock markets and commodity prices. Despite 2015 being the year that chemicals M&A finally surpassed the financially enhanced 2007 peak, the attention has already focused on 2016. Although the chemicals industry is far from immune from global economic and market volatility, fundamental drivers of chemical industry health remain positive. The question of whether 2016 will turn from “boom to bust” should not be a major worry for chemicals M&A – the question really will be if 2016 could even surpass 2015. With the acquisition of Syngenta already announced, 2016 could prove to be close to another record year. As Figure 1 shows 2016 has already started strongly for chemicals M&A.

There is no doubt the collapse in oil prices and related upstream feedstocks, such as benzene and propylene, have helped many parts of the chemical value chain. More importantly, up until now, demand in North America and Europe has remained steady. Significantly for chemicals M&A, companies have very healthy balance sheets, are still struggling to find higher growth markets through organic means and are therefore seeking expansion through acquisition. Indeed with stock market volatility and the perception (rightly or wrongly) that valuations may have declined, there is even a belief that price negotiations will be more balanced.

As Figure 2 shows, profitability in the chemicals industry has not been impacted significantly by any oil price or end market factors. Profits have remained at the level of the last few years and companies are still deriving much of their profit from US and Europe, with Asia relatively robust, albeit at a lower profit margin for many companies.

Figure 1 Value of Chemicals M&A Figure 2 Chemical Company Profits



This high profit level obscures another trend which remains a central driver of chemicals M&A – the continued profit growth of specialty chemicals and the perpetual move downstream through acquisition and consolidation by the chemical majors. As Figure 3 highlights, although profits have grown across all major sectors of chemicals, specialty chemicals profits have outperformed. The inexorable move downstream through M&A and organic growth has resulted in rising profits in specialty chemicals as consolidation, optimisation, economies of scale and globalisation have all contributed to specialty chemicals profit growth.

Figure 4 shows the spectacular growth in large specialty chemical transactions, emphasising that the chemicals world is changing as fewer commodity deals are making

way for a surge in large specialty chemical transactions. This has almost exclusively been driven by US and European companies, with Asian companies only recently moving more downstream. As Middle Eastern companies have played very little part in specialty chemicals, their impact on future M&A will be negligible.

Will 2016 prove to be bad year for chemicals M&A? While 2016 will probably not quite reach the peak of 2015, the feedback from senior executives, transactions in the pipeline and our own analysis, all indicate a very robust chemicals M&A environment. Much of the pent-up demand from 2014-15 could lead to several large deals coming to fruition in 2016. Any pause in the market is likely to occur in 2017, but the market will remain underpinned by the changing industry landscape as companies continue to realign their portfolios.

Figure 3 Chemical Company Profits by Sector (Indexed)

Figure 4 Number of $1bn Chemicals Transactions



Valuation Review

The decline in equity markets in January and February 2016 has dented the valuations of some chemical companies. What is rather surprising is that the fall has been less pronounced than one might expect. Certainly European chemical companies have been impacted by the general market volatility and decline in some sectors, but the US chemicals companies have been more resilient. As shown in Figure 5, trading multiples have declined by c. 1x EBITDA, which is much less than the overall markets have fallen.

Specialty chemicals in sectors such as Food and Feed Ingredients, Flavors and Fragrances and Pharma and Agro Ingredients in particular continue to trade at close to previous high levels.

Transaction multiples are naturally slower to react as these are driven by fundamental business performance, underlying value and synergies. Hence we do not expect transaction multiples to fall appreciably in 2016. Several larger chemical companies remain committed to undertaking larger acquisitions in 2016 and, combined with deals already in the pipeline or coming to market, will likely underpin transaction values in 2016. Transaction multiples are shown in Fig 6.

Although we expect to see several larger transactions in Europe and the US this year, the raw material advantages currently enjoyed by many companies may actually depress some transaction multiples while having little effect on the absolute value of the deal. With raw material benefits flowing to the bottom line, some buyers currently regard these as windfall profits that will not be sustainable, hence multiples based on LTM EBITDA may actually appear lower than expected. It is unlikely that this will persist much beyond Q3/4 2016.

Figure 5 Chemical Company Trading Multiples

Figure 6 Chemical Company Transaction Multiples



For 2015, most of the transaction multiples fall broadly into the valuation pattern of the last few years. Clearly as mentioned earlier, the most striking trend is the shift upwards towards more specialty chemical transactions (Figure 7).

Sub Sector Performance and Valuations

The Valence Indices, as expected, show a fall across most sectors over the past 12 months. This is demonstrated in Figure 8. The star performer continues to be Pharma and Agro Intermediates which continues to outperform the market, with many of the constituents such as Lonza performing strongly over the 12 months, irrespective of any recent weakness. Only a few others sectors such as Food Ingredients have remained in positive territory as many of these companies are seen as “defensive stocks” and are also often M&A targets.

Conversely, many of the sectors have fallen very significantly in the last year. It should be noted that some of these falls are somewhat exaggerated due to the relatively high levels these individual constituents reached, fuelled often by M&A or break-up options. Some sectors have experienced real volume declines such as Agrochemicals and Fertilizers which have impacted share prices. Interestingly there is an element of contagion as other sectors which have yet to witness shrinking markets have also seen stock prices and multiples fall. For example, LyondellBasell, despite posting increased EBITDA results, has seen its share price and multiples fall.

Figure 7 Chemical Transactions by Type – 2014 Comparison

Figure 8 Valence Indices 1-Year Performance



With stock prices probably remaining volatile over the coming months, we expect the Valence Indices to remain broadly flat. On balance, many negative investor perceptions are already priced into chemicals share prices (often unjustified), therefore we believe the prospect of price rises is as likely as falls. If profitability is maintained and M&A continues as expected, our forecast would be for a more balanced chemicals market in 2016.

Chemicals M&A 2016

In short, expectations for 2016 remain strong and any potential softening in chemicals M&A activity will depend on global demand trends in the second half of the year. Chemical companies will take advantage of strong balance sheets to expand their growth options through M&A.

Private equity appears less able to deploy capital in the US markets where the availability of debt for LBOs has become challenged. Conversely European debt markets are keen to invest in the larger high quality chemicals business. This split in the market is unlikely to persist and there are signs that the markets in the US are easing, hence we expect by 2016 Q2/3 that private equity will be able to compete more aggressively in the US.

Overall sentiment and fundamentals show 2016 should continue to be strong year for chemicals M&A regardless of recent market volatility. The more interesting question will be whether 2017 will show a more pronounced slowdown in activity. We hope to have greater visibility into this in our next newsletter.

The Valence Group, LLC, is a member of FINRA and SIPC.

This is a market commentary and is intended neither as investment advice nor recommendation for specific securities.TVG Ltd, authorised and regulated by the Financial Conduct Authority (FRN: 505298.), has approved this as non independent research in connection with its distribution in the United Kingdom. This research is for our clients only. This document is not independent and should not be relied on as an impartial or objective assessment of its subject matter. Given the foregoing, this document is deemed to be a marketing communication and, as such, designed to promote the independence of investment research and TVG Ltd, is not subject to any prohibition on dealing ahead of dissemination of this document as it would be if it were independent investment research.

© 2016 The Valence Group, LLC© TVG Ltd

The Valence Group

The Valence Group is a specialist investment bank offering M&A advisory services exclusively to companies and investors in the chemicals, materials and related sectors.

The Valence Group team includes a unique combination of professionals with backgrounds in investment banking, strategic consulting and senior management within the chemicals and materials industries, all focused exclusively on providing M&A advisory services to the chemicals and materials sector.

The firm’s offices are located in New York and London.

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chemicals m&a 2015-16files.ctctcdn.com/1716d75f001/7594f62b-ca81-4646-824f-16064461… · 2015...

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