| AMSTERDAM, May xx
AMSTERDAM, May xx Hunger for deals after the credit crisis has lead to a record start to chemicals sector acquisitions this year and bankers say the consolidation will continue as firms seek higher margins and diversified markets.
The value of chemical sector M&A pushed above $30 billion with Solvay's (SOLB.BR) agreed buy-out of French group Rhodia RHA.PA in April, a record start to any year, before DuPont (DD.N) raised its bid for Denmark's Danisco DCO.CO on Friday.
The two deals are part of a trend of chemicals firms moving away from commoditized base chemicals and into higher margin and higher growth areas such as nutrition or high-end plastics, looking for economies of scale and diversification in markets.
Cost savings and caution toward M&A in the past couple of years also mean companies have amassed cash and are now emerging from the global recession keen to go on the offensive.
"Corporates are sitting on a lot of cash, credit markets are open and there is up pent-up demand for M&A activity," one U.S.-based sector banker said.
A European banker added that Germany's BASF (BASFn.DE), in particular, plus also AkzoNobel (AKZO.AS) and Solvay have emerged from a fragmented European chemicals market as either the big or "chunky size" players large enough to buy-out rivals.
"Size is important because of what it enables you to do, in terms of organic growth and acquisitions," the European banker said. "The question is what happens to these smaller companies and I would expect consolidation to continue."
Deals are especially expected in the specialty chemicals and performance materials field and possible targets could be Britian's Croda (CRDA.L), French group Arkema (AKE.PA), Germany's Lanxess (LXSG.DE) or even Altana AANAF.PK.
U.S.-based groups Chemtura (CHMT.N) and FMC Corp (FMC.N) are also said to be potential targets, while a host of small to mid-cap companies could look to merge operations, bankers said.
EAT OR BE EATEN
Across the Atlantic, Warren Buffett's Berkshire Hathaway (BRKa.N)(BRKb.N) recent deal to buy lubricant maker Lubrizol Corp LZ.N has excited investors, speculating of more deals.
Deals are expected to involve either expanding a company's geographic footprint or a strategic change of direction, such as AkzoNobel's move to deepen its coatings exposure by buying British paints firm ICI in 2008 for 8 billion pounds.
Although AkzoNobel later massively restructured and wrote down about 1.2 billion euros mainly relating to goodwill, the firm divested businesses and achieved its synergies target and the deal's steep price was warranted, a banker said.
Despite AkzoNobel's eventual success, however, analysts say chief executives appear cautious to overpaying.
ING analyst Fabian Smeets said although the historical multiple for sector deals is between 8 and 10 times EV/EBITDA, the Solvay deal was at 7.3 times and DSM's deal to buy U.S. baby food ingredients maker Martek was less than 8 times.
"It is still a case of eat or be eaten though," Smeets said.
Diversification was part of industry leader BASF's strategy in buying cosmetic additives maker Cognis last year and bankers say any further consolidation will always involve BASF.
One banker has said the company is keen for deals worth 1 to 2 billion euros in coming years.
Although interest from private equity is strong, the U.S. banking source said opportunities may be limited in the short-term as chemicals firms first seek to consolidate.
Portfolio realignment via divestments and therefore opportunities for private equity would come at a later stage.
Although Solvay is now out of the market for a while, Standard & Poor's said because Rhodia's Chief Executive Jean-Pierre Clamadieu will become the Solvay CEO, the firm's "conservative approach" to leverage may gradually dissolve.
This could place the company back in the market for a large deal sooner than later and it can still do bolt-on deals.
ABN AMRO analyst Mark van der Geest expects AkzoNobel will look for bolt-on deals in coatings of around 500 million euros and organic growth in specialty chemicals through new capacity.
"I do not see that many targets in Europe. They will focus on Asia and Latin America," Van der Geest said, adding Finnish company Tikkurila (TIK1V.HE) may prove too expensive.
DuPont was once speculated as a predator of DSM, but if its Danisco deal goes ahead, this could leave DSM free to use its 2 billion euro cash pile for more deals after its Martek buy-out.
Chief Financial Officer Rolf-Dieter Schwalb said in April that DSM was "far away" from taking on any deal that would jeopardize its A3 and A credit ratings from Moody's and S&P.
DSM is said to be instead looking for mid-size deals.
"The pace of large deals look set to continue, along with a high volume of smaller transactions," said Peter Hall at M&A advisory group Valence.
(Additional reporting by Ludwig Burger in Frankfurt, Ben Deighton in Brussels and Ernest Scheyder in New York)