Record Year For Chemical Mergers

Despite all of the talk about a possible recession this year, analysts may look back on 2007 as the year of the big deal. Good economic conditions that began in 2006 created a pipeline of major acquisitions that retained a strong flow throughout the year, even as debt markets tightened.

Of the 81 mergers and acquisitions (M&A) worth more than $25 million in value that were completed during the 2007 calendar year, 11 were valued above $1 billion, six more than in 2006, according to Young & Partners, an investment banking firm that provides merger, acquisition, divestiture, and other services to chemical and life sciences firms.

The abundance of large transactions propelled the total deal value for the year to $55 billion, well above the record of $42 billion set in 2006. "The billion-plus dollar deals are very important in percentage dollar volume, representing about 70% of the total," Young & Partners President Peter Young says. At 81, the overall number of transactions "was not a record in number, which was 86 deals in 2004, but it was still very high."

The high deal volume in 2007 was likely due to the same economic factors supporting the 2006 record, according to Bruce Chalmers, transaction services director at the tax and advisory services firm PricewaterhouseCoopers (PwC). "The global economy and capital market conditions were attractive to sellers who wanted to make major changes with divestitures," he says. "It was also attractive to bidders because of the availability of good financing options for buyers." PwC compiles a chemical M&A survey that competes with Young & Partners'.

Overall, merger activity in the chemical industry has been on an upswing since the early 1990s. Young attributes this to persistent restructuring. "At that time, growth slowed, and the winners and losers shifted," he observes. "Chemical firms realized that size was not the key, but that they need to be a leader in their industry to do well."

One deal that is not reflected in Young & Partners' figures—because it was completed just after the end of the calendar year—is Akzo Nobel's purchase of ICI, valued at more than $16 billion. Announced on Aug. 13, 2007, and finalized on Jan. 2, the coatings and specialty chemicals acquisition illustrates the strength of bidding late in the year in spite of the credit market turmoil.

In fact, the second half of the year was particularly busy, with $40 billion in deals completed. "The pipeline was extremely strong—there was a lot of momentum," PwC's Chalmers explains. "Any deal with a fundamentally sound business case stayed on track, even when lending conditions changed." The weak spots in the economy, such as the U.S. housing market, did not have a global impact. "Momentum is everything," Chalmers says.

Private equity buyers, however, did feel the impact of tightening credit markets. They were responsible for 28% of the transactions in the first half of the year but only 17% in the second half. Private investors typically account for 20–30% of M&A activity, making them "material but not drivers" of overall deal-making, according to Young.

In 2007, however, private equity firms were involved in four of the top 10 deals. And PwC, in its chemicals M&A report, writes that bidding by private investors forced chemical companies to offer more in order to win takeover bids.

Young & Partners measures a deal's worth by dividing its value by the target company's earnings before interest, taxes, depreciation, and amortization. For basic chemical purchases, this ratio increased to 8.2 in 2007 from 7.1 in 2006. Basic chemical deals were a slight majority of the 81 deals overall in 2007, a reversal of 2006. For specialty chemicals acquisitions, the ratio was 10.3 versus 10.5 in 2006. Overall, the chemicals sector was neither a sellers' nor a buyers' market, according to Young.

The most active geographic market was Europe, Young & Partners found, accounting for 47% of the businesses sold, up from 42% in 2006. The U.S. was home to 30% of the businesses, an increase of two percentage points, and firms in Asia and the rest of the world represented 23% of the deals, down three percentage points. Chemical firms looked outside their geographic borders for buyers or sellers in 63% of deals.

PwC, using criteria different from Young & Partners' to track M&A totals, found that Middle Eastern companies were responsible for a quarter of the 2007 deals worth more than $1 billion. Drivers for the activity included access to low-cost petrochemical feedstocks, companies' financial wherewithal, and a desire to expand operations down the value chain, according to Chalmers.

Saudi Basic Industries Corp.'s purchase of GE Plastics for $11.6 billion is an example of a Middle Eastern company looking to diversify its products and increase access to global markets. The renamed SABIC Innovative Plastics brings to the Middle Eastern company customers in a wide range of industries, including automotive, health care, consumer electronics, transportation, packaging, construction, and telecommunications.

Other examples of 2007 deals originating in the Middle East include the purchase of Egyptian Fertilizers by Abraaj Capital of United Arab Emirates and, in a geographic expansion outside of Saudi Arabia, Cristal's purchase of Lyondell Chemical's titanium dioxide business.

Looking ahead to 2008 and beyond, Young & Partners sees a continuation of the same factors—industry restructuring, portfolio rearrangement, financial buyers, and consolidation—driving a high volume of M&A activity. However, an economic slowdown or recession would cause financial buyers to continue to lose purchasing power.

Companies with money to spend will keep buying in 2008. Dow Chemical, for example, will receive a $9.5 billion payment from Petrochemical Industries Co., of Kuwait, for half of a petrochemical joint venture. In an earnings conference call on Jan. 29, Dow stated its interest in all acquisitions, small, medium, and large.

PwC's Chalmers anticipates more players entering the scene from emerging markets, including the Middle East and China. "Emerging markets are gaining strength and have growing economies. Now they are more sophisticated cross-border acquirers and have more consumers at home. As industry shifts and adapts to those changes, we will continue to see deals moving forward."