Chemicals industry M&A activity slips slightly, but pipeline to break records

30 March 2017 6 min. read

Deal value in the chemicals industry slipped to $94 billion last year, although newly announced deals hit a record of $301 billion for the industry. As it stands, four deals valued at more than $43 billion are set to be closed in the coming years, each representing a record in value for the industry. New analysis points to consolidation and synergies as a driver for the mega deal activity.

The chemicals industry has seen M&A deal activity rise in recent years to $119 billion in completed deals in 2017, after a dip to $49 billion in 2012. In A.T. Kearney’s latest Chemicals Executive M&A Report 2017 survey, the consulting firm explores the most recent year’s results, as well as the pipeline going into 2017. The report is based on completed and announced deals made between 2001 and 2016.

Deal value and backlog over past decade in chemicals M&A

2016 was a relatively strong years for M&A in the chemicals sector, with deals totalling $94 billion. Deal activity was down somewhat on the most recent peak in 2015, when total deal value hit $119 billion. The lowest level of activity in the past decade was recorded in 2012, when deal value stood at $49 billion, following a peak the year previous of $151 billion.

While deal value fell slightly in 2016 on the year previous, the number of deals announced in 2016 but not completed in that year were considerably higher, hitting $301 billion from $117 billion in 2017 and $47 billion in 2014. The high value of announced deals in 2016 were largely the result of a number of mega deals.

Mega deals announced and closed in past decade

The megadeals that were announced in 2016, but not yet completed, include the Bayer-Monsanto deal, valued at $66 billion, the Chem China-Syngenta deal, valued at $47 billion, the Praxair-Linde deal, valued at $43 billion, and the $18 billion Potash Corp-Agrium deal.

The three biggest of the deals announced in 2016, as well as the Dow-DuPont deal announced in 2015, each would break M&A records in the industry. Mega deal activity in the past ten years has not breached the $20 billion mark, with the 2017 Access-Lyondell deal coming closest on $19 billion.

Chemical companies are consolidating

The firm’s analysis points out that one of the main drivers for deal activity in the industry is consolidation, which are said to drive a range of synergies, including market reach, capability, and efficiency. The industrial gas industry is the most consolidated according to the study, with the top five companies controlling around 86% of the market pie for the top 20. In Agrochemicals 5 companies control around 62% of market share, while in paints and coatings and fertilisers this stands at 60% and 54% respectively.

According to the firm’s analysis, the consolidation is set to continue, largely due to continued high valuations and earning expectations from investors, in an environment in which organic growth opportunities are few and far between. In addition, as Joachim von Hoyningen-Huene, A.T. Kearney Partner and report co-author, explains, “The planned mega deals highlight a broader trend of diversified chemicals companies shifting their portfolios toward more pure play models. This shift is incentivized by the higher multiples investors award to these types of chemicals companies and a quest to reap the benefits of increased market reach, capabilities, and efficiency,”

Drivers for M&A activity and impediments

In terms of the most important drivers affecting the industry’s continued interest in M&A activity, emerging market firms seeking access to advanced technologies or application know-how ranks number one, cited by 82% of respondents, followed by a resurgence of the US chemical industry because of low-cost feedstock, cited by 61% of respondents. Downstream integration of Middle Eastern petrochemical firms takes the number three spot, cited by 58% of respondents as a driver.

The authors also identified key impediments to inorganic growth strategies. Top among these in increasing economic volatility, followed by current level of valuations and multiples, at 37% and 31% of respondents respectively. The current oil price, politically driven interventions and global GDP growth take the number three, four and five spots respectively as potential impediments.

Guttorm Aase, Principal at A.T. Kearney and co-author of the report, adds, “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 business environment will look like in the next 12 to 24 months. Despite these uncertainties, fundamentals support continued strong chemicals M&A activity in the year ahead with further consolidation of more chemicals value chains.”

Regional investment dynamics

Deal activity has increasingly shifted to China, where the share of deals increased steadily from 3% in 2003 to around 20% of all deals in 2009 – the years since have remained relatively stable, hitting 24% in 2016. The US has seen its share of deal activity see ups and downs, falling from 25% in 2003 to around 16% in 2009, before again increasing to 20% last years. South Korea has seen its share of the pie increase, from around 1% to %, while Germany has seen its share fall steadily in recent years,, from around 10% to 4%.