News / Insights

Mega-deals

2016 ended on a high note. The early Christmas present delivered by Praxis on December 20^th provided a welcome end-of-year fillip, pushing up the total value of deals by 128% from Q3, although deal volume overall was also much stronger, up by over 50% from the previous quarter.

Added to the ChemChina acquisition of Syngenta and Bayer’s move for Monsanto earlier in 2016, these mega deals accounted for 68% of the total deal value announced last year in the Chemicals industry last year.

Analysts at this stage are not anticipating a similar level of mega-deal activity in 2017 but those already in the pipe could themselves spark M&A activity as businesses are divested for anti-trust reasons.

High valuations

There’s absolutely no shortage of cash to buy thanks to high profits for chemical corporates and private equity firms seeking acquisitions. Which means those willing to sell are asking for, and getting, high valuations. Prices are shifting upwards to historic levels.

Brokers are talking about 15x EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) being the new 10X which, not long ago, was seen as a ceiling. Companies are seeking strategic acquisitions to unlock value in their business because of a lack of organic growth in the sector and the US market appears to be particularly attractive for global buyers.

Trump’s impact on chemicals sector deals

One reason the US chemical industry attracts interest is because of its relatively stable growth. The election of President Donald Trump may have led to some political uncertainties but not, so far, in the business sector, including chemicals.

President Trump’s anti-free trade policies are not good news for such a global industry but there’s hope that his protectionist approach could spur global companies to ensure they have a foothold in the US, the world’s largest economy. Such a trend would provide a further boost to M&A.

For now, the President’s well publicised support for the energy sector and an expectation that he will relax regulations are providing the chemical sector with enough confidence to put to one side concerns about abandoned trade agreements.

Cross-border deals

Looking beyond the 2016 figures driven by the mega-deals, another statistic stands out. Last year, 78% of total deal value was attributed to transactions made outside country boundaries.

This upward trend is hardly surprising given the international nature of the chemicals sector and the growing move towards economic globalisation. And if it’s here to stay, it signals a new requirement for M&A practitioners.

Cross-border deals can be complex because of the potential regulatory, political and cultural differences between the countries. Essential requirements such as conducting due diligence can become dangerously opaque unless conducted by those with extensive knowledge of the countries involved. There are no short cuts here.

Companies will always follow the value but, in doing so, it’s vital they prepare for journeys that could become increasingly hazardous. Not to do so would be like climbing Everest without a sherpa.