NEW YORK—Mergers and acquisitions in the chemicals sector has been driven by strategy rather than scale, and are proceeding at a more measured pace this year, according to global rating agency Fitch Ratings.
The firm with dual headquarters in New York and London, says the slower M&A pace likely reflects a healthier chemicals industry where more participants view themselves as acquirers or feel they have compelling standalone growth prospects.
Recent deals have been strategic moves allowing entry into specialized spaces or diversifying product portfolios. The ratings agency’s transaction multiple for chemicals companies has increased to 9.3x for the LTM period ended May 31 compared to 8.9x in 2011 and 8.0x in 2010.
Examples include Eastman Chemical Co.’s multibillion dollar acquisition of Solutia Inc., which helped extend its global reach and added businesses with unique technologies and differentiated products.
The recent Cabot Corp.-Norit N.V. merger gives Cabot entry into the activated carbon market.
Monsanto Co.’s purchase of Precision Planting, Inc. allows it to provide solutions beyond seeds, traits, genomics, and herbicides to boost crop yield and farm productivity.
Funding the deals has been relatively easy, as debt borrowing costs remain very attractive. Investor demand for chemicals debt has also allowed companies robust access to markets. In addition to debt financing, chemical companies have used cash balances and even equity financing, both of which remain alternative options of funding for many.
Indeed, Fitch says there is no pressing need for chemicals companies to engage in M&A for growth, as the chemicals industry benefits from healthy, mid-to-peak cycle earnings. Balance sheets have strengthened and companies are flush with cash, limiting the number of distressed assets available.
Exceptions include companies overly exposed to Europe and those dependent on high-priced oil feedstocks.
However, challenges in the space remain. A slowdown of the U.S. recovery, further European economic weakness, or lower Chinese economic growth could dampen revenues and earnings.