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Strong Year Already for Chemicals M&A
Following a reasonably good year for mergers and acquisitions
(M&A) in 2005, when $33 billion in transactions worth more
than $25 million each took place, activity in early 2006
indicates another strong year. Young & Partners predicts there
will be 70 to 80 deals with a total value in the $30 billion
range. Other bankers expect the value of M&A deals to be much
higher. In the first six weeks alone, around $24.6 billion in
chemical transactions were announced, including Linde's
acquisition of BOC, BASF's acquisition of Degussa's
construction business and its hostile bid for Engelhard, Texas
Petrochemical's purchase of Huntsman's Butadiene and Methyl
tert-butyl ether (MTBE) business, and Huntsman's acquisition
of Ciba Specialty Chemical's textile effects business.
Upcoming transactions include Sasol's unloading of its Condea
olefins and surfactants business, the sale of Lucite by Ineos,
and the divestment of Uniqema by ICI, and the competition
between Merck KGaA and Bayer for Schering.
The newest trend in M&A is the entrance of a fourth category
of buyer. Traditionally U.S. and Western European companies
and private equity firms have been the three main types of
players in chemical M&A. Beginning in 2005, Asian, Indian, and
Middle Eastern companies became active in the market and are
expected to be more so in 2006 and onward. According to
analysts, many well funded companies in these regions are
looking to become more global.
About 50 percent of the M&A activity in 2005 took place in
Europe, as large diversified companies divested non-core
assets. About one quarter of the deals were U.S.-based. Asia
and the rest of the world accounted for the other quarter. For
2006, BASF is currently the biggest player. Large U.S.
companies are looking for appropriate acquisitions as well.
European companies continue to put businesses on the block.
Private equity will continue to play a significant role as
consolidators for the industry. Analysts expect most of the
M&A activity to take place in the specialty chemical sector.
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Despite sales growth of 35 percent for its Indian business,
Bayer does not anticipate making any significant investments
in the country for the next several years. According to the
company, India must improve its infrastructure before large
investments will be considered. Bayer does plan, though, to
make small investments in its CropScience, Health and
Materials Systems businesses in India in support of its
customers.
Lonza and Singapore partner Bio*One Capital will each invest
$250 million to build a large-scale mammalian cell culture
plant to produce biopharmceuticals, the first biopharma
manufacturing site in Singapore. Located in Tuas Biomedial
Park, the plant will include up to four mammalian bioreactor
trains with capacities of 1,000 liters-20,000 liters.
Construction will occur in two phases and is expected to be
completed by the end of 2009.
Increased consumer spending within Japan, combined with strong
exports to China and the U.S., contributed to significantly
improved earnings for many Japanese chemical firms in 2005.
High raw material and energy costs did impact profitability,
though. For many companies, the strong electronic chemicals
market helped to offset some of these higher costs.
High raw material and energy costs are working against
improved cost savings and increased sales for European
chemical firms. Higher costs "masked" significant annualized
cost savings achieved by Clariant, according to the company.
Degussa earnings remained flat despite a 9 percent increase in
sales due to raw material and energy price increases. Rhodia
continues to struggle to return to profitability in the face
of "volatile raw material and energy costs," according to CEO
Jean-Pierre Clamadieu.
Chemical production in the U.S. rose for the second month in a
row in January 2006, according to the American Chemistry
Council (ACC). All regions of the country except the Southeast
and Gulf Coast experienced year-on-year growth as well.
Reasonable economic growth, the ability to push through price
increases that offset higher energy costs, and low levels of
expected capacity expansions are drivers for this growth,
according to Standard & Poor's.
The Chinese government is expected to implement a further
appreciation in its currency of only 2-3 percent in 2006.
Revaluation is not expected to impact economic growth in
China. The slow appreciation will enable the country to
maintain its trade surplus of 15-20 percent growth.
Tax rebates for gasoline and Naphtha exports were suspended by
China's State Administration of Taxation just three months
after being reinstated. The rebates were initially suspended
at the beginning of the fourth quarter of 2005 in order to
alleviate tight domestic supply, but were resumed at the end
of the year. Although exports declined in January 2006, they
increased by 32 percent as compared to the same month in 2005,
leading to the re-suspension of the rebates.
Polyolefin producers Reliance Industries, Haldia
Petrochemicals and Gail India will continue to protect their
customers from any future decline in prices. Customers will be
reimbursed the difference between the new lower prices and the
price they paid. All three companies reduced polyolefin prices
immediately following the reduction of import tariffs in order
to remain competitive. The move failed to attract customers,
however, so the price protection measures were introduced.
Increasing investment in petrochemical production capacity in
China at a time when the Chinese economy is experiencing a
slowdown could be problematic in upcoming years. Expanding
capacities in the Middle East will only further complicate the
situation. The slowing global economy and rising protectionism
in the west are contributing to a reduction in the growth rate
of the Chinese trade surplus as well. The future will largely
depend on increased domestic consumption, which is an unknown
factor. The government is also dealing with unrest in rural
areas and a rising disparity between urban and rural incomes.
According to the Federal Reserve, chemical production in the
U.S. Gulf Coast has returned to normal. Demand in the country
is expected to rise with the beginning of the construction
season. The U.S. energy industry is also expected to increase
production, which should help reduce costs.
BOC and Linde announced that Linde will acquire BOC for $14.4
billion (GBP 8.2 billion). The agreed value is nearly 8
percent higher than the original bid proposed by Linde. The
deal is expected to close in the third quarter of 2006. With
annual sales of $14.3 billion (Euro 11.9 billion), the new
company will become the largest producer of industrial gases,
surpassing Air Liquide. Because the two companies have
complementary geographic positions, substantial divestment
requirements are unlikely, according to analysts. Linde is,
however, expected to divest its material handling business and
BOC's Gist logistics business, plus some other BOC operations
in order to fund the deal.
Demand for specialty chemicals for personal care products will
increase by 10 percent per year in China as compared to 2.5
percent annually in the U.S. and Europe, according to Kline &
Company. Consumption of chemicals for cosmetics and toiletries
in China is estimated to be 40,000 tonne and valued at $270
million (Euro 224 million). Conditioning polymers and rheology
modifiers each account for 30 percent of the market, followed
by specialty surfactants and emollients at 20 percent each,
with miscellaneous products like antimicrobials, UV absorbers,
hair fixative polymers, and skin whitening actives making up
the remainder. Kline estimates the global market for cosmetics
and toiletries to be $3 billion, with the U.S. and Europe
accounting for 60 percent and China 9 percent. The annual
growth rate for finished C&T products in China is projected by
Kline to be 15 percent.
