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Chemical Mergers Intensified In 2006

Acquisitions of basic chemical businesses fell as those of specialty chemical businesses rose

by William J. Storck
February 12, 2007 | A version of this story appeared in Volume 85, Issue 7

Merger and Acquisition (M&A) activity among chemical producers increased in 2006, according to Young & Partners, a New York City-based investment banking firm that provides merger, acquisition, divestiture, and other services to the chemical and life sciences industries.

In a just-released survey of M&A activity in the chemical industry, the firm says 76 transactions with a value greater than $25 million took place last year. This was up slightly from 72 similar transactions in 2005.

At the same time, the total value of those deals was $42 billion, up from just $33 billion in 2006. Indeed, the total value for 2006 was a record, eclipsing the previous record of $39 billion seen in 1999.

Young & Partners President Peter Young cites a number of highlights within last year's M&A activity. "First, you had record dollar volume. The second is there was one particularly big deal," he says, referring to Linde's acquisition of rival industrial gas producer BOC at a value of $15.5 billion.

"The third is that commodity chemical and specialty chemical merger and acquisition markets are going in opposite directions," Young says. Commodity chemical valuations have gone down while those for specialty chemicals have risen.

Young & Partners measures the value of deals by dividing a company's enterprise value, roughly its overall worth, by its earnings before income taxes, depreciation, and amortization, commonly called EBITDA. For commodity chemical assets, this ratio fell to 7.1 in 2006 from 8.2 in 2005. "That's a big drop," Young says. Meanwhile, the ratio for specialty chemicals rose to 10.5 from 9.6.

The two segments of the industry also went in opposite directions in terms of the percentage of total deals. Early last year, after a surge in basic chemical deals in 2005 to 56% of the total, Young & Partners predicted a reversal in 2006. And that is just what happened. Basic chemicals declined to 30 deals, or just 39% of the mergers and acquisitions. Specialty chemical transactions rose to 46 last year from 33 the year before.

As for the home region of acquisition targets, Europe has topped the list every year since 2001, according to Young, who calculates this metric as a percentage of total acquisition targets. The number two spot has gone back and forth between the U.S. and a category called Asia and the rest of the world. The U.S. fell to third place in 2005, with 24% of the takeover targets, but regained second position in 2006 when it held 32% of the targets. Europe's share of targets in 2006 dropped to 42% from 49% in 2005, and that of Asia and the rest of the world declined slightly to 26% from 27%.

In contrast, no one region dominates as the home base of acquiring firms. Measured by number of deals, European companies took over the lead from the U.S. in 2001, relinquished it to U.S. firms in 2003 and 2004, and then made a comeback in 2005 and 2006. European buyers purchased 29 chemical operations in 2006, down from 35 in the previous year, while U.S. buyers rose to 24 from 17, and buyers in Asia and the rest of the world increased to 23 from 20.

According to Young, one headline for the 2006 survey is the dramatic drop in the share of deals completed by financial buyers, or private investment funds. "For a number of years," he says, "financial buyers have been in the 25-28% range in the number of deals." In 2006, though, they dropped to only 16%, or 12 deals, from 28%, or 20 deals, in the previous year.

An even bigger decline for financial buyers, according to Young, is in their share of the dollar volume, falling to only 17% from 36% of the dollar volume in 2005. The dollars spent by financial buyers in 2006 totaled $7.0 billion, compared with $11.6 billion in the prior year.

The decline in the number of financial buyers can be seen in the top 10 deals. In 2005, financial buyers made four of the top 10 acquisitions. In 2006, they accounted for only two: Apollo Management's acquisition of General Electric's advanced materials business for $3.8 billion and Wendell Investissement's purchase of construction chemicals maker Groupe Materis for $1.3 billion.

The top 10 acquisitions in 2006, headed by Linde's $15.5 billion buy of BOC, had a combined value of $32.2 billion, compared with $24.4 billion in 2005. In terms of big acquisitions, five deals were worth more than $1 billion last year, compared with nine in 2005.

Linde's acquisition of BOC last year was one of two hostile takeovers, which are unusual for the chemical industry, Young says. The other was BASF's hard-fought takeover of Engelhard.

What lies ahead? Young says the volume of deals will remain healthy as the main drivers of M&A activity continue. These include ongoing industrial restructuring, business portfolio management, active financial buyers, and consolidation activity.

Young says specialty chemical deals will continue to be the most common. He notes that transaction values are rising for specialty chemicals but continue to fall for commodity chemicals as buyer interest has waned. In short, Young says, "the merger and acquisition market will continue to be extremely active but split between languishing demand for commodity chemicals and strong demand for specialty chemicals."



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