Excerpt: Main Findings. Chemicals Executive M&A Report 2016

Transcription

1 Chemicals Executive M&A Report 2017 Excerpt: Main Findings Chemicals Executive M&A Report 2016 i

2 About the Report This report presents a review of M&A activity based on an analysis of all completed and selected announced deals in the chemicals industry between 2001 and 2016 and provides an outlook for 2017 based on a study of executives at leading chemicals companies, investment banks, and investors. The study was conducted in December 2016 and January ii

3 Contents Main Findings A.T. Kearney M&A Services and Contacts 2 8 The complete "" contains: Main Findings M&A Outlook for 2017 Executive Interview 2016 M&A Review Global Geographies Methodology A.T. Kearney M&A Services and Contacts 1

4 Main Findings 2

5 Main Findings Expectations have never been higher for mergers and acquisitions (M&A) in the chemicals industry At the outset of 2017, we look back on a year with robust yet modest activity the value of completed deals in 2016 declined slightly compared with 2015 but the backlog of deals is at a level never seen before with more than $300 billion of potential transactions. This is more than twice the backlog at the end of 2015, which itself was an all-time high and more than the combined deal activity of 2014, 2015, and 2016 (see figure 1). Behind this backlog are a handful of mega deals each of which would break deal-size records if completed. Over the past 10 years up until last year, not one deal had exceeded the $20 billion mark. As of early 2017, four deals are under way that are each valued at between $40 billion and $70 billion (see figure 2). At the heart of this trend is an acceleration toward greater scale in chemicals value chains and segments In area after area, companies have focused their portfolios to reach higher levels of consolidation and are reaping the benefits of market reach, capability, and efficiency through M&A (see figure 3). In industrial gases, Air Liquide closed its acquisition of competitor Airgas in the middle of 2016 for $13 billion the largest deal completed that year and at the end of 2016, Praxair and Linde announced their intent to merge, a deal that would be valued at $43 billion. Figure 1 The backlog of pending deals is at a level never seen before with more than $300 billion of potential transactions Completed and pending deals , deal value in $ billion Newly announced deals represent $230 billion, including: Bayer Monsanto ChemChina Syngenta Praxair Linde 200 Includes Dow DuPont, 2015 s largest announced deal Deals announced in that year or before and not completed in that year Completed deals of the year Sources: Dealogic; A.T. Kearney analysis 3

6 (See our interview with Airgas new CEO Pascal Vinet on page 13.) In agrochemicals, multiple deals are under way or have been announced, including Dow and DuPont s merger, Bayer s acqui sition of Monsanto, and ChemChina s acquisition of Syngenta. Similar activity is happening in paints and coatings and fertilizers, where the race for the merger endgame appears to be in progress. Looking ahead, we expect consolidation to accelerate in chemical segments where customer industries exhibit high levels of consolidation or are trending in this direction, including segments such as consumer goods, automotive, and electronics. Consequently, we may see the next wave of consolidation triggered in chemicals segments such as personal and home care, electronic materials, as well as further consolidation in OEM coatings. Further contributing to deal activity are chemicals companies balance sheets and investment portfolio decisions. Valuations and investor earnings expectations remain high, and with slowing demand outlooks, companies looking to deploy capital are finding that organic investment options do not meet their return requirements, turning them toward M&A. In our study of chemicals executives conducted for this report, more than half saw these as important drivers of deal activity (see figure 5). Figure 2 Four deals are under way that are each valued at between $40 billion and $70 billion in the past 10 years not one deal exceeded $20 billion Top 10 completed and pending deals ($ billion) Approval by European Commission pending Deal completion expected by end Deal completion expected by second quarter Deal in early stage, Business Combination Agreement planned for May 2017, deal completion up to 15 months afterward Deal completion expected by mid Dow DuPont (2015) Bayer Chem Monsanto China Syngenta (2016) (2016) Praxair Linde (2016) Access Lyondell (2007) Dow Rohm & Haas (2009) Potash Corp Agrium (2016) Merck Sigma Aldrich (2015) Akzo Nobel ICI (2008) Air Liquide Airgas (2016) Pending Completed 1 4 Reuters as of February 8, 2017 manager magazin as of February 6, Reuters as of December 13, 2016 World Fertilizer magazine as of November 9, Reuters as of February 8, 2017 Sources: Dealogic, Reuters, manager magazin, World Fertilizer; A.T. Kearney analysis 4

7 Figure 3 Chemical companies are consolidating key value chains and segments to increase market reach, capability, and efficiency Level of consolidation by revenue, not including pending deals 1 Industrial gas Agrochemicals Paints and coatings Fertilizers 14% 86% 38% 62% 40% 60% 46% 54% Top five companies Next 15 companies 1 Company allocation to segments defined by Capital IQ classifications and industry reports, followed by manual screening: agrochemicals and fertilizers split into separate segments Sources: Capital IQ, Dealogic; A.T. Kearney analysis Moreover, diversified chemicals companies are increasingly shifting their portfolios toward more specialty pure play models, incentivized by the higher multiples investors award to specialty and solutions chemicals companies. A prime example of this trend is the merger of Dow and DuPont where the company will be split into three parts with two solution and specialty businesses and one feedstock-oriented business. Figure 4 Investors are rewarding solution-focused chemicals companies with higher multiples than broad-based companies EBITDA % vs. EV/EBITDA multiple of top chemical companies, average EBITDA (%) Feedstock-focused commodity companies: Higher EBITDA margin than broad-based companies, but lower EBITDA multiples Solution-focused specialty companies: ~60% higher EBITDA than broad-based companies and ~60% higher EBITDA multiples 5 Broad-based classical chemical companies EV/EBITDA Feedstock-focused Broad-based Solution-focused Note: EV is enterprise value. EBITDA is earnings before interest, tax, depreciation, and amortization. Sources: Bloomberg; A.T. Kearney analysis 20 5

8 Figure 5 Several drivers support continued M&A, but chemicals executives see economic volatility as a potential disruptor Top drivers and impediments of future M&A activity, share of executives selecting trend 1 Emerging market firms seeking access to advanced technologies or application know-how 82% Resurgence of US chemicals industry because of low-cost feedstock Downstream integration of Middle Eastern petrochemical firms Limited returns on organic investment options Balance sheet strength and liquidity of chemical companies 61% 58% 57% 55% Global GDP growth 27% Politically driven interventions 29% Oil price 30% Current level of valuations and multiples 31% Increasing economic volatility 37% Drivers Impediments 1 Percentage of respondents who stated either driver or impediment Sources: A.T. Kearney executive survey; A.T. Kearney analysis Regional investment dynamics have transformed chemicals M&A activity, a trend that appears to be accelerating (see figure 6). Whereas US and European acquirers used to dominate, China has steadily increased its share of global deal volume to become the number one country of origin for transactions, representing 24 percent of all deals. This reflects the trend of emerging market firms seeking access to advanced technologies or application know-how from mature markets, called out in A.T. Kearney s study as the most important driver for future activity. We expect this trend to continue as government-driven consolidation in supply industries such as steel, coal, and chemicals in China is creating more national champions that in turn pursue international growth strategies through M&A. We expect similar trends to continue in India, although at more muted levels. Although currently a small share of activity, chemicals activity in the Middle East is also expected to pick up as companies expand their chemicals portfolios, partly driven by the uptake of direct oil-to-chemicals processes, which provide favorable economics for crude oil producers. This could trigger joint ventures and partnerships with North American, European, or Chinese companies, but it could also prompt acquisitions, with a focus on gaining access to global markets. 6

9 While these signs point toward more M&A, several disruptors could radically change the direction of the industry, chief among them macroeconomic factors related to trade and tariffs, taxation, economic growth, and interest rates. With new levels of uncertainty brought on by political upsets such as Brexit and the US election, chemicals companies are facing difficult questions about what their environment will look like in the next 12 to 24 months. The executives we surveyed say economic volatility is the strongest impediment to M&A growth. With the potential for chemicals M&A activity in 2017 to reach its highest level ever, the question is which chemicals chains will be the next to consolidate and what further deal activity this could trigger. In the words of this year s executive interviewee, Airgas CEO Pascal Vinet, such moves may reinforce the need for others to reassess their position and continue to adapt. His words about whether we have seen the last mega deal in the industrial gas market also seem appropriate for other chemicals chains and segments: It is difficult to imagine, but never say never. Figure 6 Regional investment dynamics have fundamentally changed and made China the leader in acquisitions Regional composition of chemicals M&A activity by acquirer origin (% of deals) 100% 80% 45% 32% All others 60% 4% 5% 5% Germany France South Korea 10% 11% Japan 40% 3% 1% 13% 20% United States 20% 25% 24% China 3% 0% Sources: Dealogic; A.T. Kearney analysis 7

10 A.T. Kearney M&A Services and Contacts 8

11 Recent publications Transformation through M&A Integration A major acquisition is not only an opportunity to achieve synergies, but also a valuable moment in time to bring about true change. The best leaders get these transformational decisions right. Mergers create both excitement and anxiety for stakeholders, generating not only destabilizing uncertainty, but also malleability, which encourages openness to new ways of working. Many mergers actually destroy value; executive teams that see a merger as an opportunity to reset their business can defy the odds and create incremental value. Mergers and Acquisitions in Oil and Gas After a challenging year for the oil and gas industry, it faces a debt-driven shakeout and M&A takes center stage. Prolonged depressed and volatile oil prices are forcing companies to structurally reduce costs. Financially weaker operators with high debt are facing liquidity issues and will be forced to sell to secure cash or have credit facilities withdrawn. At the same time, IOCs and larger stronger independents will be looking to streamline their portfolio and sell. There are limited buyers in the market, but this represents an opportunity for stronger companies and financial investors. However, price volatility is creating significant uncertainty and is delaying M&A decisions and actions. Mergers and Acquisitions in Utilities From the breakup of the utilities sector in Europe to its remodeling in other regions, investors have a major hand in M&A activity worldwide. The global utilities and energy infrastructure sector, driven in large part by financial investors, is changing dramatically and for markedly different reasons around the world. Global deal activity in the sector reached a record high of $355 billion in 2016, and the trend promises to accelerate. Portfolio optimization and divestitures could drive another record year in 2017 through mergers and acquisitions of utility and energy infrastructure companies. Authors Joachim von Hoyningen-Huene, partner, Munich joachim.hoyningen-huene@atkearney.com Guttorm Aase, principal, New York guttorm.aase@atkearney.com Thomas Rings, partner, Dubai thomas.rings@atkearney.com Taek Lim, consultant, Düsseldorf taek.lim@atkearney.com To subscribe to the Chemicals Executive M&A Report, please chemicalsmandastudy2017@atkearney.com. You will receive the report by as soon as it is released. 9

12 A.T. Kearney is a leading global management consulting firm with offices in more than 40 countries. Since 1926, we have been trusted advisors to the world s foremost organizations. A.T. Kearney is a partner-owned firm, committed to helping clients achieve immediate impact and growing advantage on their most missioncritical issues. For more information, visit Americas Atlanta Bogotá Boston Calgary Chicago Dallas Detroit Houston Mexico City New York San Francisco São Paulo Toronto Washington, D.C. Asia Pacific Bangkok Beijing Brisbane Hong Kong Jakarta Kuala Lumpur Melbourne Mumbai New Delhi Perth Seoul Shanghai Singapore Sydney Tokyo Europe Amsterdam Berlin Brussels Bucharest Copenhagen Düsseldorf Frankfurt Istanbul Lisbon Ljubljana London Madrid Milan Moscow Munich Oslo Paris Prague Rome Stockholm Stuttgart Vienna Warsaw Zurich Middle East and Africa Abu Dhabi Doha Dubai Johannesburg Riyadh For more information, permission to reprint or translate this work, and all other correspondence, please ChemicalsMandAStudy2017@atkearney.com. This report is intended for information purposes and should not be relied upon. A.T. Kearney accepts no responsibility as to the accuracy or completeness of the statements being made and makes no warranties or representations in relation to the report. Any distribution, duplication, even in the form of extracts, to third parties is only permitted upon A.T. Kearney s prior written consent. A.T. Kearney s liability arising out of any use of the report by any person or entity, or by any such reproduction or distribution, whether permitted or not, is hereby excluded. The signature of our namesake and founder, Andrew Thomas Kearney, on the cover of this document represents our pledge to live the values he instilled in our firm and uphold his commitment to ensuring essential rightness in all that we do. A.T. Kearney Korea LLC is a separate and independent legal entity operating under the A.T. Kearney name in Korea. A.T. Kearney operates in India as A.T. Kearney Limited (Branch Office), a branch office of A.T. Kearney Limited, a company organized under the laws of England and Wales. 2017, A.T. Kearney, Inc. All rights reserved. Photos: Chemicals Executive M&A Report