fitch: strategy over scale in chemicals m&a

July 11 - Mergers and acquisition activity in the chemicals space has been
proceeding at a more measured pace this year, and deals that have been completed
were driven by strategy rather than scale, says Fitch Ratings. We believe 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.

Recently completed deals have largely been strategic moves allowing a company
entry into more specialized spaces and diversifying product portfolios.
Strategic acquisitions typically have greater potential upside allowing for
greater deal multiples, underscored by an examination of recent historical deal
multiples. The median Fitch calculated 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.

Last week, Eastman Chemical Co. (rated 'BBB' with a Negative Rating Outlook by
Fitch) completed its multibillion dollar acquisition of Solutia Inc., which
helped to extend its global reach and also added businesses with unique
technologies and differentiated products. The recent Cabot Corp.-Norit N.V.
merger gives Cabot entry into the activated carbon market, while Monsanto Co.'s
(A+/Stable) purchase of Precision Planting, Inc. allows it to provide solutions
beyond seeds, traits, genomics, and herbicides to boost crop yield and farm
productivity. Looking ahead, we believe potential M&A activity will be tilted
toward strategic acquisitions and likely centered in the specialty chemicals
sector.

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.

We note there does not seem to be a pressing need for chemicals companies to
engage in M&A as a growth motivator as the chemicals industry benefits from
healthy, mid-to-peak cycle earnings. For the most part, 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.

While chemical companies aren't under immediate pressure to achieve growth via
M&A, economic challenges remain. A slowdown of the U.S. recovery, further
European economic weakness, and/or lower Chinese economic growth could dampen
revenues and earnings.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market
commentary page. The original article, which may include hyperlinks to companies
and current ratings, can be accessed at www.fitchratings.com. All opinions
expressed are those of Fitch Ratings