EY Parthenon: global chemicals industry set for consolidation

14 December 2020 Consultancy.eu

While the Covid-19 pandemic is dragging drag down transaction values in the global chemicals sector, some sub-segments are set to see a spike in deal volume, according to a chemical industry mergers & acquisitions report by EY Parthenon.

The global pandemic came at a time when the chemicals market worldwide was already grappling with myriad challenges. Some are fundamental, most notably the moral and regulatory push towards more sustainable practices. Others are more immediate – trade wars and plummeting oil prices among them.

Not surprisingly, risk-weary investors have been relatively tight with their money in recent years – until 2019, which was a sparkling year for global M&A. In a remarkable rally for the chemicals market, deal value in the sector crossed $180 billion last year – the highest since 2016 and the second highest in two decades.

Global M&A activity in chemicals between 199 and 2020

According to EY Parthenon, three megadeals drove this jump – the mammoth Saudi Aramco IPO, the IFF/N&B business of DuPont, and Showa Denko’s pick up of Hitachi Chemicals. Unfortunately, the momentum gained in 2019 was met with a force majeure like no other – a global pandemic.

“The impact of a major crisis can be significant; we saw a decreased number and value of transactions after the global financial crisis in 2009 and after the dot-com crash. We expect a similar structure after the Covid-19 pandemic,” explained Andreas von Buchwaldt, EY-Parthenon’s Strategy Leader for the EMEIA region.

Uncertainty is the biggest driver of these downturns, according to von Buchwaldt, and uncertainty has been rife this year. Already in April, experts from Strategy& painted a bleak picture of a post-covid chemicals industry – with plummeting demand, disrupted supply chains, falling stock prices, and a changing competitive order.

Average calculated takeover probability for 2020 and degree of industry concentration of all chemical companies with sales exceeding US$100m by subsector

The average investor lays low during these periods. Large moves are simply too risky, big players hold off on selling due to low valuations, liquidity pressure is high and debt financing opportunities are few and far between, all while travel restrictions make cross-border M&A less appealing than ever. 

That would be the average investor. At the same time, some bold players use the uncertainty to swing a good deal. “Financial distress has historically been a major driver of M&A activity because of attractive company valuations,” noted Daniel Riegler, Sell & Separate EMEIA Lead at EY-Parthenon.

Price volatility is high, valuations are low and companies are struggling with profitability and liquidity. All these high-risk factors combine to give buyers high leverage in the current chemicals market, making big takeovers more likely. “From a sector perspective, we expect high levels of global M&A activity in fertilizers, plastics processing, and paints and coatings. This forecast is based on a calculated takeover probability combined with the degree of consolidation per sector,” added Riegler.

M&A activity based on market size and concentration

Consolidating a fragmented segment

Another factor to spur buyers on is the chemical industry’s low concentration – a scenario where several relatively small businesses compete for market share instead of domination by a handful of big companies. In search of that competitive edge, chemical companies will be on the lookout for good deals within their means.

The upshot of this scenario is high deal volume, but presumably low value. Historically, low concentration segments – petrochemicals, diversified chemicals, paints & coatings, plastics manufacturing, etc – are home to the highest share of deals, but the lowest share of big-ticket transactions. Given the risk of spending big at the moment, this trade-off is likely to persist in the near future.

Despite high leverage for buyers, Von Buchwaldt rounded off the study by describing chemicals as a “sellers market,” as it  “has not been hit as hard as consumer services or aviation, for example.”

“Opportunities still exist, with chemical majors streamlining their portfolios, in the small to midsized markets. It is here that we find companies, already under financial pressure before the crisis, with the Covid-19 pandemic intensifying their distress. On the buyer side, there are many interested investors.”