As with any industry sector, mergers and acquisitions (M&A) are a focal point of interest for competitors, employees, the media and in some cases it even peaks the interest of the general public. The proposed acquisition of BG Group by Royal Dutch Shell is one such example. But what drives these deals? What makes them so interesting to us?
To properly answer these questions we must look to the global environment and review the current business and financial climates. It does not take a rocket scientist to work out that we currently live in rather uncertain times both economically and politically. After what was the worst financial crisis in history we are now seeing steady growth in the US but the situation in China, Europe and Japan is not so rosy, indeed neither is the state of emerging markets particularly those of Brazil and parts of South East Asia. Europe is an interesting case study with the state of the Eurozone and the matter of Greek debt which continues to hold the EU on tenterhooks. These issues of growth are against a backdrop of political violence and unrest in the Middle East where the rise of ISIS and other tyrannical non-state actors threaten the stability of the region and are playing havoc with the traditional status quo. All of this serves to increase the pressure on capital flows, economic performance and exchange rates. This all sounds rather negative but there have been bright spots such as the fall in oil prices which has benefitted many economies, the revival of the Indian economy with a change in government and several quantitative easing programmes in Europe and Japan.
Against this, few would argue that earnings performance of the chemical industry as a whole has been robust but there are areas of weakness for some petrochemical companies. These are mostly linked to uncertain demand levels and the falling oil price which has dented performance in first quarter of this year. When one takes the geopolitical tensions and concerns over the global economy into the fold there are some uncertainties. All of these factors are central to how the chemical industry behaves on an M&A basis. CEO’s and executives are looking for growth, strong cash flows and strong earnings however they may now begin to exercise some caution because of these factors. To put this into perspective, let us briefly look at the figures. According to Young & Partners there were 108 chemical deals completed in 2014 compared to 83 in 2013. This is a 30% increase in the number of deals completed year-on-year and a higher number than any year since 1986. Looking across all of these, the two leading chemical sectors were commodity chemicals with 33 deals and high value petrochemicals at 28 deals. (See Equity Deal Value Table for USD Year-on-Year Figures)
However with the uncertain outlook it is likely that fewer deals will be completed this year but Young & Partners says that the appetite for such activity will continue despite this due to demand for growth and the build-up of cash amongst strategic buyers and available low cost debt financing and unused funds for financial buyers. They say that “We expect that 2015 will see at least $55 billion in completed deals and the number of deals completed will slow down from last year’s 108 to below 90”. For Specialised Products and the shipping markets M&A activity in the chemical industry is an important indicator of how the trade is performing and it could be argued that an increase in M&A deals may serve to reinvigorate the Specialised Products marketplace.