Chemical industry sees $184 billion decline in M&A value after reduction of mega deals

15 March 2018 Consultancy.uk

While the global chemical industry saw robust levels of merger and acquisition (M&A) activity in 2017, value languished well below the total seen in 2016.  Overall there were 637 deals in the segment of note last year, a fall of 13, however, due to fewer ‘mega deals’ occurring, the drop in value was disproportionately greater – reducing by over $180 billion.

Like the wider M&A segment, the chemical industry has seen heightened activity over the past three years. The latest figures for M&A in the chemicals sector were recently released by Deloitte in its ‘2018 Global chemical industry mergers and acquisitions outlook’. The report covers the previous year, as well as expectations for the year to come.

The figures highlight that volume has been relatively stable over the past decade, with deal-counts at between 500 and 700 over the period. Following a peak in 2011, of almost 650, deal count fell back to around 520 in 2013. Over the period, deal value, was, meanwhile, more stable at around $50 billion in 2011 and around $35 billion in 2013.

Global chemical merger and acquisitions

2014, reflecting wider growth in interest in the M&A market, saw the start of rapid growth in deal value – topping around $74 billion that year. The year following, deal value jumped to $150 billion, while in 2016 – the top of the most recent value peak – total value hit $231 billion, largely on the back of $182 billion in mega-deals.

2017 was more reserved, and only one chemical deal in 2017 exceeded $5 billion, as compared to five such deals in 2016. While deal volume was steady at 637, value plummeted to $46.4 billion. While the steep decline of $185.5 billion in value can mostly be attributed to an absence of mega-deals, however, 2017 also saw largely high-valuation, which could inhibit M&A activity going into 2018.

Global chemical M&A activity

The study also found that the global chemical M&A activity of the private equity market has been relatively stable in terms of volume over the past decade, with the past seven years noted for deal volumes of between 50 and 70. Value saw more fluctuation, with a recent high point in 2012 of around $10 billion, falling the following year to around $3.5 billion. The low point in 2016, of $3 billion saw an almost doubling last year to just under $6 billion.

Regional activity

The US continues to be the main locality for deal activity, with around 200 deals over the past four years. However, China has become increasingly active, with deal activity spiking to almost 100 from close to 50 between 2010 and 2013. The UK has remained relatively stable at around 40 deals per year over the period 2010-17, with Germany too relatively stable over the most recent period.

Total deal volume by target

The study shows that the commodities segment has continued to reign supreme in terms of volume, with 387 deals recorded in 2017, the highest recorded level over the past eight recorded years. Industrial gasses recorded the second lowest volume over the recorded period, at 10 deals, while diversified recorded the lowest number of deals, at 3 (from 9 the year previous).

The firm writing regarding the trend into this year, “Global chemical mergers and acquisitions activity in 2018 is expected to remain strong, as high valuations continue to be mitigated by improving global economic conditions, continued inexpensive financing, and an appetite among industry participants for growth and transformative M&A transactions.”

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8 tips for successfully buying or selling a distressed business

18 April 2019 Consultancy.uk

Embarking on the sale of a business is one of the most challenging experiences a management team can undertake. Even serial dealmakers acknowledge that the transaction process can be gruelling, exposing management to a level of scrutiny and challenge through due diligence that can be distinctly uncomfortable.

So, to embark on a sale process when a business is in distress is twice as challenging. While management is urgently trying to keep the business afloat, they are simultaneously required to prepare it for scrutiny by potential acquirers. Tim Wainwright, an experienced Transactions Partner with Eight Advisory, says that this dual requirement means sellers of distressed businesses must focus on presenting their business in a way that supports buyers in identifying value, whilst simultaneously being open about the causes of distress. 

According to Wainwright, sellers of distressed businesses should focus on eight key aspects to ensure they are as well prepared as possible:

  • Cash: In a distressed situation cash truly is king. Accurate forecasting and day-by-day cash balances are often required to ensure any buyer is confident that scarce cash reserves are under proper control. 
  • Equity story and turnaround plan: Any buyer is going to want to understand the proposed turnaround strategy: how is the business going to enact its recovery and what value can be created that means the distressed business is worth saving? Clear presentation of this strategy is essential.
  • The business model: Clear demonstration of how the business model generates cash is required, with analysis that shows how financial performance will respond to key changes – whether these are positive improvements (e.g., increases in revenue) or emerging risks that further damage the business.  Demonstrating the business is resilient enough to cope with these changes can go a long way to assuring investors there is a viable future.
  • Management team: As outlined above, this is a challenging process. The management team are in it together and need to be consistent in presenting the turnaround. Above all, the team needs to be open about the underlying causes that resulted in the distressed situation arising.  A defensive management team who fail to acknowledge root causes of distress are unlikely to resolve the situation.

8 tips for successfully buying or selling a distressed business

  • Financing: More than in any traditional transaction, distressed businesses need to understand the impact on working capital. The distressed situation frequently results in costs rising as credit insurance becomes more difficult to obtain or as customers and suppliers reduce credit. Understanding how these unwind will be important to the potential investors.
  • Employees: Any restructuring programme can be difficult for employees. Maintaining open communications and respecting the need for consultation is the basic requirement. In successful turnarounds, employees are often deeply engaged in designing and developing solutions. Demonstrating a supportive, flexible employee base can often support the sale process.
  • Structuring: Understanding how to structure the business for the proposed acquisition can add significant value. Where possible, asset sales may be preferred, enabling buyers to move forward with limited liabilities. However, impacts on customers, employees and other stakeholders need to be considered.
  • Off balance sheet assets: In the course of selling a distressed business, additional attention is often given to communicating the value of items that may not be fully valued in the financial statements. Brands, intellectual property and historic tax losses are all examples of items that may be of significant value to a purchaser. Highlighting these aspects can make an acquisition more appealing.

“These eight focus areas can help to sell a distressed business and are important in reaching a successful outcome, but it should be noted that it will remain a challenging process,” Wainwright explains. 

With recent studies indicating that the valuation of distressed business is trending north. With increased appetite from buyers who are accustomed to taking on these situations, it is likely that more distressed deals will be seen in the coming months. “Preparing management teams as best as possible for delivering these will be key to ensuring these businesses can pass on to new owners who can hopefully drive the restructuring required to see these succeed,” Wainwright added.