Megadeals may drive chemicals industry M&A to new heights

2016 is set to become a strong year for M&A in the chemicals industry, fueled by lacklustre organic growth opportunities, low feedstock prices and divestment agenda. This year is also likely to see a number of mega deals, which may see the year’s total value outstrip the 2011 record and double last year’s $110 billion.

Global M&A activity has been humming on the back of corporates flush with cash as well as Private Equity firms with large portfolios they are seeking to enter/exit. Total deal value over 2015 hit almost $5 trillion according to a McKinsey & Company analysis. Further recent analysis shows that 2016 is likely to be another strong M&A year – although some analysts predict there may be a tapering of deal value and volume. 

The chemicals industry too rode higher last years, as global M&A deal values rose by 30% to $110 billion in the industry, a fourth straight annual increase. In a new report from A.T. Kearney, the consulting firm explores the chemicals M&A outlook for the coming year. The report was developed from market analysis over the past 15 years as well as a survey of executives within the industry.

The major drivers for activity this year, according to the survey, are the limited returns on organic growth. 26% of respondents cite the need for expansion through inorganic growth as a strong driver, while 44% cite it as a driver. According to A.T. Kearney’s analysis, chemicals companies had high valuations relative to historical earnings in 2015. To sustain these valuations, the consultancy notes, companies will need to increase earnings—which is difficult to achieve purely organically, leading many to turn to M&A. 

Divestment to clean up their portfolio was cited by 15% of respondents as a strong driver and by 55% as a driver. The divestment drive is the result of the need for chemical companies to aggressively re-evaluate their portfolios and divest non-core assets, driven by the growing importance of achieving scale, focus, and coherence in their portfolios. Chemical companies are also reacting to lower oil prices, spurring a strong drive for M&A at 22% of companies, and a drive at 47% of companies. The lower oil price, while a boon for many, also places pressure on companies whose operations tie into oil field activity – the survey finds that 6% of those surveyed face a strong impediment to M&A activity in a low oil price environment.

An analysis of buyer profiles shows that European countries have, since 2002, seen a reduction in volumes as a proportion of the global total. The UK fell from 8% of total volume to 4%, while Germany also fell 4%. Switzerland and France have stayed stable, unchanged at 2% and 4% respectively. The report notes that more than half of the executives believe that Europe may be in for a resurgence of M&A activity in 2016.  

The US has seen only a slight increase, from 21% to total volume to 22%, although this is expected to increase this year on the back of cheap oil and feedstock. China on the other hand, has seen a considerable increase in transaction volume, increasing from 4% in 2002 to 21% in 2015, its momentous rise – which is predicted to continue into 2016 – is primarily driven by outbound transactions as a stabilised Yuan helps Chinese companies to acquire overseas.

“China’s influence on the global M&A market is likely to increase in 2016 as more companies look to acquire world-class know-how and growth opportunities outside their slowing home markets. Undervalued targets in mature markets such as Europe are likely to be attractive targets for these acquirers,” says Linus Hildebrandt, Principal at A.T. Kearney.

The market may also hit new M&A heights this year, not seen since the record $151 billion in M&A deals booked in 2011. The high value for the coming year are on the back of three announced mega-deals, one of which is dubbed the mega-deal of mega-deals (the $68.58 billion Dow Chemical and DuPont merger, creating a $130 billion mega chemical company). The second big deal announced for the coming year is ChemChina's $43 billion bid for Syngenta.

The report adds that, even as megadeals drive up overall deal value, chemicals industry leaders also expect deal volume to increase in 2016. Two-thirds of executives say that they expect activity to either increase or strongly increase in 2016.