A muted 2015 in terms of completed transactions, gave way to a more active M&A market in 2016, as the energy sector began to regain confidence. The chemicals sector saw several blockbuster deals over US$3 billion in 2016, following on from the headline-grabbing Dow and DuPont merger in 2015. The most notable of these was perhaps the Bayer-Monsanto deal.
The chemicals sector saw several blockbuster deals over US$3 billion in 2016, following on from the headline-grabbing Dow and DuPont merger in 2015. The most notable of these was perhaps the Bayer-Monsanto deal.
“It is a good example of the kind of transformational, portfolio-shifting transactions we’ve seen in the chemicals sector recently. It shows there is a huge appetite for large transactions. Strong earnings and a lack of M&A activity over the preceding two or three years means that a lot of companies have large war chests to invest. And with debt funding still cheap, there is strong appetite for M&A,” says Christian Specht, XXX at KPMG in Germany.
Another example of the transformational deals driving M&A activity is the announced US$3.2 billion acquisition of surface treatment provider Chemetall by BASF.
“These deals are signs of the on-going portfolio shifting we are seeing in the market,” says Specht.
“In Europe, some of the larger chemicals companies have even been facing the prospect of negative interest rates, so they were under enormous pressure to do something with their capital. And of course, one of the main ways to deploy capital more effectively is through M&A.”
“At the same time, margins have been under pressure and R&D is getting more and more expensive, particularly in key sub-sectors like pharmaceuticals and agro-chemicals, so companies are trying to find synergies to help reduce costs.”
“In the past, CEOs were looking for the perfect 10. Now they are realizing that is unrealistic, so they are happy to go with an 80 percent or 90 percent fit instead. This is having an impact on overall levels of M&A activity, as those acquisitions are then trimmed to better fit the portfolio and non-core activities are sold off,” says Specht.
A muted 2015 in terms of completed transactions, gave way to a more active M&A market in 2016, as the energy sector began to regain confidence.
“Over the past 18 months, as oil prices have decreased, the ability of companies to invest in M&A has been reduced. This had a negative impact on earnings. Similarly, from a power and utilities perspective, the global slowdown in GDP growth has led to low load growth. This, coupled with a glut of gas in key markets like the United States, kept power pricing down, meaning earnings and top line growth were low,” says Henry Berling, Managing Director and Head of US Energy Investment Banking for KPMG Corporate Finance at KPMG in the United States.
“Companies were largely in ‘survival mode’ in 2015, looking internally to find savings and drive earnings growth. But now that the worst seems to be behind us in terms of the global picture, they are looking externally for inorganic growth opportunities.”
The data seems to support this view. Deal values in the sector were up to XX, the highest for five years, while deal volumes also achieved a solid XX, led by several major transactions out of Canada.
“Canada has long been a stable market. It has several big energy and power companies with large sums of capital that needed to find homes. The size of these companies tends to mean that their M&A transactions tend to be big, too.”
“The renewables market also continues to be attractive, with favorable tax legislation and subsidies that are helping to drive the development of renewables, relative to conventional energy. Wind and solar development, for example, has outpaced conventional assets.
“We expect to see a new wave of transactions in 2017 as part of a trend towards market rationalization. This will likely include a focus on infrastructure and transportation-type assets, which are seen as ‘safe havens’ at times of volatility,” says Berling.