Big chemical companies use credit crunch to get ahead in the market

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Major corporates in the chemicals industry are taking advantage of the credit crunch to buy up target companies in key growth markets, according to advisory firm Clearwater Corporate Finance.

It says that the difficulty in securing debt funding is giving trade buyers an advantage in the market and creating new opportunities for both them and investors alike.

In 2007 the chemicals industry saw a sizeable number of billion-dollar mergers and acquisitions as the major groups sought to dominate key markets. Akzo Nobel’s $16m acquisition of ICI, Access Industries’ $13bn acquisition of Lyondell, SABIC’s $11.6bn acquisition of GE Plastics and Hexion’s $10.6bn acquisition of Huntsman were all symbolic of the deal frenzy.

Constantine Biller, chemicals industry analyst at Clearwater, says: “With debt financing now more restricted, there will be fewer multi-billion dollar deals this year. However mid-market mergers and acquisitions are likely to remain relatively buoyant as they are not affected to the same extent by the debt markets.”

“Many private equity houses and investors, who rely on debt funding, are finding it hard to compete with trade buyers and in many cases they cannot take part in bidding at all. Large companies such as BASF, Dow, Ineos and PPG all have balance sheets that can support multiple acquisitions.”

“The timing is ideal for major corporate players to make bolt-on acquisitions, in the knowledge that private equity bidders are unlikely to be able to compete. Many are already using the opportunity to buy up target companies in key growth markets and even an economic downturn will not stop them.”

“A further feature in mid-market deals is the appearance of buyers from the Asia-Pacific, Eastern Europe, the Middle East and other emerging markets. Players such as Sinopec and Tata Chemicals are regularly appearing on the horizon when European and North American assets come up for sale.”

“With the strong demand in their domestics markets, favourable domestic labour costs and their ongoing demand for both innovative products and new routes to market, they can take advantage of the situation to make their mark through mergers and acquisitions. Other countries expected to feature amongst strategic buyers in the near future include Brazil, Indonesia, Russia and Thailand.”

“With many major multi-nationals still scouring the market for suitable targets, some will also consider realigning their porfolios by disposing of non-core businesses. Once such example is Chemtura which, having acquired Baxenden in the UK, has sold its fluorochemicals and oleochemicals units. This will create opportunities for mid-sized groups that want to make the leap to the top table in the industry.”

“The current market also holds opportunities for investors looking to expand their portfolios. They can take advantage of the conditions to build critical mass in specific industry segments with the intention of an eventual sale in 2009 or 2010.”

According to Biller, the list of attractive product segments includes active pharmaceutical ingredients, adhesives and coatings, agrochemicals and pesticides, catalysts, cleaning chemicals, explosive chemicals, fine chemicals, food additives, fragrances and flavours, oilfield chemicals, personal care ingredients, solvents, synthetic organic polymers and water additives.

“The credit crunch will not stop the flow of mergers and acquisitions in the chemicals sector,” concludes Biller. “There remains a lot of interest in deals and the conditions offer new opportunities for both trade buyers and investors alike.”

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