Challenges ahead for global chemicals M&A – A.T. Kearney

May 16, 2018
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The peak in chemicals M&A may be coming to an end, according to A.T. Kearney’s new Chemicals Executive M&A Report. Despite more than 60 per cent of global chemicals sector executives anticipating stronger M&A activity in 2018 than in 2017, a growing number expect a drop in activity as a result of the limited availability and high prices of targets.

The report provides a detailed review of the deal activity in 2017 and the outlook for chemicals M&A, based on a survey of executives in the industry. The continuous chemicals deal activity in the past few years has consolidated the industry, segment by segment. The most concentrated segment is industrial gas, where more than 85 per cent of the market sits with five companies. Recent consolidation activity focused on the agrochemicals sector—the Bayer-Monsanto deal represents a prominent example, A.T. Kearney said.

New entrants to the market, combined with a lack of innovation and organic growth, have increased competition and will continue to fuel demand for targets in specialties and fine chemicals. While the share of specialties transactions rose marginally in 2017 from 41 per cent to 43 per cent volume-wise, there was an increase from 22 per cent to 45 per cent in value terms. For those late in the game, high multiples will be paid for remaining M&A opportunities, according to the report.

Meanwhile, Thomas Rings, partner at A.T. Kearney, said that despite a low activity over the past years, chemicals M&A in the Middle East is expected to increase, driven by the regional downstream investment strategies and as well as push for localisation. Chemical players and NOCs in the region can accelerate their expansion by focused acquisitions which will provide them with access to new markets, technology and capabilities in managing chemical downstream businesses. Most deals are likely to be mid-sized.

Otto Schulz, lead partner of A.T. Kearney’s Global Chemicals Practice, said: “The simple endgame is over and the next wave of chemicals M&A will be more complex. This will require companies and their executives to also consider smaller strategic targets to drive growth, versus large transformational deals to capture cost synergies.”

A.T. Kearney’s Rings said: “International chemicals M&A activity puts pressure on Middle East chemicals players and NOCs to step up M&A activities to secure the right international assets to support downstream strategies and secure future competitiveness. This next development step will enable regional players to move beyond the joint venture based business models.”

“To be successful on the M&A front, regional players have to develop the right “M&A muscle” along the entire M&A process. This includes an overall M&A strategy, deal strategies, due diligence, transaction management and especially value creation through pre- and post-merger integration,” Rings added.  

The past year saw the creation of DowDuPont, and the largest deal in 2017 was BASF’s acquisition of Bayer’s crop science businesses. A.T. Kearney’s report said the regulatory pressure on mega mergers to comply and streamline portfolios will spur a first wave of strategic deals in 2018. The divestitures will be tempting for many financial investors and will be welcome additions to the portfolios of some of the larger industry corporations.

Most deals are expected to continue to originate from China or the United States. The report highlights that China continues to be the global leader in chemicals M&A volume—representing more than 25 per cent of the deals in 2017, even though some are share restructurings without much integration and value creation.

Globally, the wave of large-scale consolidation and geographical expansion is coming to an end. New M&A opportunities are primarily based on the fact that the companies built by the recent mega mergers will be streamlining their portfolios to comply with regulatory requirements, and as a result will soon bring assets to the market.

“To achieve long-term growth, chemicals companies must explore and embrace M&A opportunities,” said Gabriela Baum D’Ambra, manager at A.T. Kearney. “This will drive competitiveness through innovation, digitisation, and sustainability.”