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Chemical Makers Looked To Big Deals

Finance: Strategy was the merger and acquisition theme for 2015

by Alexander H. Tullo
December 21, 2015 | A version of this story appeared in Volume 93, Issue 49

Big deals are back, and how.

The year was already brisk with merger and acquisition activity and a number of headline transactions. Then Dow Chemical and DuPont made the ground tremble with a $130 billion merger agreement. To say it is the largest chemical deal of all time doesn’t do it justice. No other chemical deal has ever approached even $20 billion in size.

But as unusual as it is in size, the Dow-DuPont agreement is similar to other recent deals in terms of rationale. Chemical companies have been on the hunt for large deals that will strengthen their positions in desirable lines of business.

“Across the board right now, buyers are interested in strategic combinations,” says Chris Cerimele, managing director of the boutique investment bank Balmoral Advisors.

The formation of DowDuPont is three such deals in one. That is because current plans call for the company to split into three firms within two years from the deal’s close, which is expected next year.

One company will be a $19 billion-per-year agrochemical giant, larger than the current number one, Monsanto. It will have strong positions in seeds and chemicals for corn, soy, cotton, and other crops.

DowDuPont will create a $51 billion materials science company that combines Dow’s leading position in polyolefins with DuPont’s in engineering polymers. Together, the breadth of their offerings in packaging and automotive markets will be unparalleled. The company may also house Dow Corning, the silicones joint venture Dow is buying out for $4.8 billion.

Even the specialty products spin-off will be substantial, with $13 billion in sales. It will marry Dow’s and DuPont’s electronic materials business, creating a leading supplier to makers of semiconductors and other electronics.

The Dow-DuPont merger is the capstone for a strong year in deal-making. According to PricewaterhouseCoopers (PwC), 880 chemical transactions were announced through the third quarter of 2015. The same period last year saw 815 deals.

Companies are doing more deals, and they are paying more for them, too. Through September, companies paid, on average, 12.8 times the earnings before taxes of the firms they acquired, according to PwC. Last year, that factor was 8.6.

Chemical companies are willing to pay big money for strategic impact, Cerimele says. “Strategic buyers are driving valuations.”

For example, Air Liquide is paying an ample price, $13.4 billion, for Airgas. The price is more than 13 times Airgas’s pretax earnings. But for its money, the French firm is getting an improved position in the U.S. It is also getting a unique opportunity to integrate Airgas’s strong retail gas business with its own large-scale gas production plants upstream.

Solvay’s $5.5 billion acquisition of Cytec Industries was similar. The Belgian specialty chemical maker paid a pretty penny for the New Jersey-based firm. But the acquisition represents a big step into carbon fiber composite materials.

With the record-shattering Dow-DuPont transaction in the works, next year will probably be another robust one as rivals unveil more large transactions to keep up.


Top Headlines of 2015

Top Research of 2015

Revisiting Research of 2005


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