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Merger Market Thaws

More credit and a high interest in fertilizers spurred chemical acquisitions in 2010

by Melody M. Bomgardner
February 21, 2011 | A version of this story appeared in Volume 89, Issue 8

The climate for making deals in the chemical industry warmed considerably last year compared with the recessionary chill of 2009. The dollar value of acquisitions jumped to $36 billion in 2010 from $25 billion the previous year, according to Young & Partners, an investment banking firm that provides acquisition, divestiture, and other services to chemical and life sciences firms.

Even more striking, Young & Partners President Peter Young says, the number of deals valued at $25 million-plus soared to 64, more than double the 24 eked out by the industry in 2009. The end of that year marked the trough for valuations of chemical businesses, Young says, and prices have been rising steadily since.

In 2010, nine deals worth more than $1 billion were completed, showing that the appetite for growth, rather than mere survival, had returned postrecession. In 2009, a year when only five transactions breached the $1 billion mark, the acquisitions of Rohm and Haas by Dow Chemical and Ciba by BASF were the two largest deals. But both megadeals had been announced in 2008, before the financial crisis reached the chemical industry.

The biggest survival story of the recession was that of LyondellBasell Industries. The reemergence of the commodity chemical firm, a large manufacturer of polyethylene, polypropylene, and propylene oxide, leads the top 10 list of deals for 2010.

In early 2009, LyondellBasell, only recently formed, folded under a mountain of debt and declared bankruptcy. During 2010, the company’s board fended off a takeover attempt from India’s Reliance Industries by working out a deal with its creditors. Private equity firm Apollo Management took a 29.2% stake and LyondellBasell’s previous owner, Access Industries, claimed a 9.9% interest. Overall, the cost to creditors to relaunch the firm was just under $10 billion.

The return of private equity buyers was an important reason more deals were inked in 2010. “The financial crisis severely impacted the ability of financial sponsors to acquire chemical industry assets in 2009 and early 2010,” Young relates. In fact, he points out, because of tight credit markets, private buyers accounted for only 15% of deals and 2% of their dollar value in 2009. Financing became more available in the second quarter of 2010, causing activity to pick up sharply, he says. For full-year 2010, private equity groups claimed 21% of completed deals and 42% of their dollar value.

Private equity firm Bain Capital was responsible for the sixth-largest chemical deal in 2010 when it snapped up the Styron styrenics business of Dow Chemical for $1.6 billion. Styron had been put together the previous summer from Dow’s operations in styrene derivatives such as acrylonitrile-butadiene-styrene. Dow also included its polycarbonate, latex, and synthetic rubber operations and its 50% stake in the deal.

At the time of the sale, Dow Chief Executive Officer Andrew N. Liveris said, “We are committed to further focusing our portfolio by shedding nonstrategic assets that can no longer compete for growth resources inside the company.”

Private equity firms can get a good deal when a chemical company decides to shed an asset because of a change in strategy, explains J. William Breen, a managing director at investment bank National Capital. Dow’s shift from commodity to specialty chemicals is one such change. “You can be reasonably sure, with few exceptions, that when a private equity firm buys a company, they will sell it in three to five years,” Breen says. “They think it will be worth more by then, and today they are getting it for a good number.”

Another example is Cytec Industries’ recent agreement to sell its building block chemicals business to an affiliate of H.I.G. Capital for $180 million. “If they sold it a few years ago, they would have gotten more money; if they held it for a few years, they might get more,” Breen points out. “But you have to leave something for the buyer to benefit from—they won’t buy it at a peak.”

Despite the availability of financing, for most of 2010, the market for acquisitions wasn’t exactly frothy, Pricewaterhouse Coopers observes in a recent report. “During the first three quarters of 2010, we saw deals move forward at a deliberately slower pace than they did during the predownturn period,” says Tracey Stover, PwC’s global chemicals leader. She attributes the caution to concerns that volatility coming out of the recession would make it difficult to estimate expected earnings. In the fourth quarter, as more financial trends became evident and competition heated up, deal-making moved more quickly, she writes.

Companies planning to expand their holdings in the fertilizer sector were happy to put up with rising valuations. Four of the top 10 deals of 2010 were inked by fertilizer firms. Among the buyers were CF Industries, which won a 14-month battle to take over rival firm Terra Industries, beating out an offer by Norway’s Yara. Meanwhile, Brazilian mining firm Vale set about buying an 80% stake in Brazil’s Fosfertil from owners Bunge, Mosaic, Yara, and others, spending $5.7 billion. Fosfertil has been renamed Vale Fertilizantes.

“The amount of arable land is fixed or declining, population is growing, and in the developing world people are shifting to the Western diet, meaning they are growing grain to feed beef,” Breen says. “Fertilizer will be in high demand and low supply.” The possibility of unending growth has meant that many companies see fertilizer firms as undervalued, Breen adds.

The consolidation activity in the fertilizer sector drove deal values up to nine to 13 times annual earnings before interest, taxes, depreciation, and amortization (EBITDA), according to a report by McGladrey Capital Markets, an investment banking firm. Those multiples compare with rising, but still lower, valuations in the overall chemical sector of 8.2 times EBITDA for 2010.

Experts studying mergers and acquisitions in the chemical industry expect that 2011 will bring continued acceleration in the number, pace, and value of deals. The pipeline of deals ahead includes 26 that were announced in 2010 but did not close by the end of the year, Young of Young & Partners says. Together, those deals are valued at roughly $26 billion.

“Where things stand right now, there is all kinds of cash in corporate coffers and private equity funds ready to be deployed,” Breen points out. “The increase seen in 2010 would have been larger if it didn’t take so long to get a deal done. Many more will happen in 2011—they are accelerating and closing with less difficulty.”


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