Deal Capsule - Transactions in Chemicals October 2016

Deal Capsule - Transactions in Chemicals October 2016

Monsanto agreed to Bayer’s $66 billion acquisition offer. Consolidation in the agrochemicals and fertilizer market continues.

Head of Chemicals and Pharmaceuticals, KPMG in Germany

KPMG AG Wirtschaftsprüfungsgesellschaft

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KPMG’s Deal Thermometer indicates that the environment for M&A activity will remain moderately strong in chemicals.

Deal focus areas

Deal activity remains buoyant in the chemical sector. The value of all completed deals increased by 60% to $56 billion in Q1-Q3 2016 versus Q1-Q3 2015. Consolidation was especially pronounced in the fertilizer segment. Germany continues to be one of the most active countries with a focus on high margin specialty segments.

Agrochemicals continue to dominate the M&A landscape as Bayer AG reached an agreement to acquire Monsanto Co. for $66 billion. Monsanto finally accepted Bayer’s fourth offer to create the world’s largest agrochemical company with combined revenues of $26.5 billion in crop protection and seeds.

China National Chemical Corp. (ChemChina) acquired the remaining 40% stake in ADAMA Agricultural Solutions Ltd. from Israel’s Discount Investment Corp., valued at $1.4 billion. Subsequently, ADAMA combined with Hubei Sanonda Co., Ltd., another firm owned by ChemChina. The new entity is valued at $3.9 billion.

Fertilizers

In the market for fertilizers consolidation continues likewise. 33 deals have been completed in the sector in 2016 to date. In contrast to the specialty agrochemicals sector the market for fertilizers generally offers lower margins in particular due to fierce competition. The market is expected to grow by 2-3% annually until 2020.

After failing to acquire K+S AG, Canadian fertilizer producer Potash Corp. of Saskatchewan Inc. agreed to combine with Agrium Inc. The $13.1 billion tie-up would create the world’s distinct leader in fertilizers and Canada’s third largest natural resource company.

The merger integrates Potash’s low-cost production business of potash, nitrogen and phosphate with Agrium’s leading retail distribution platform and smaller scale production segment. Operating synergies are expected to amount to $500 million annually.

One of the main competitors in the field, Russia’s PJSC Uralkali, attracted interest by Belarus private investor Dmitry Lobyak who acquired a 20% stake valued at about $1.7 billion.

Consolidation is also apparent in the Chinese market as Jinguyuan Holding Co., Ltd. acquired Golmud Possession Grid Potash Co., Ltd. for $1.6 billion.

Industrial gases

Linde AG and Praxair Inc., two of the world’s largest industrial gas suppliers, held talks to combine in a merger of equals. However, the potential creation of a new global leader collapsed as both companies were unable to find common ground on governance issues.

The merger talks followed the $13.4 billion acquisition of Airgas Inc. by Air Liquide SA whereby the French company gained the number 1 position in the sector. Air Liquide just secured the refinancing of the deal by the successful issuance of multiple bonds. In addition, it completed the divesture of assets to comply with the conditional antitrust approval in the US. Matheson Tri-Gas Inc., a unit of competitor Taiyo Nippon Sanso Corp., acquired several businesses and production facilities from Air Liquide for $0.8 billion.

Capital index

Following a set-back at the beginning of the year, chemical indices climbed throughout all global markets in 2016, gaining 4% to 8% on a year to date basis.

German companies performed exceptionally strongly with Covestro AG (+54.8% YTD) and Lanxess AG (+30.3%) leading the field. Notable laggards include Yara International ASA (-22.7%) and LG Chem Ltd. (-21.6%).

Lanxess continues expansion

German specialty company Lanxess AG further pushed its expansion strategy by the announced $2.4 billion acquisition of Chemtura Crop., a leading supplier of lubricant and flame retardant additives. Chemtura’s portfolio is highly complementary to Lanxess’ own additives business. The combined operations are expected to command high EBITDA margins of 20%.

The acquisition follows Lanxess’ bid for the clean and disinfect business of Chemours Co. and the creation of a joint-venture with Saudi Aramco in Q2 2016. All deals are part of a strategy to improve business set-up and expand into higher margin segments.

Plastics

The plastics industry experienced strong M&A activity in 2016. While demand is continuously growing in Asia, Western markets are more mature and thus offer less opportunities for organic growth. This drives consolidation as firms strive to expand their business.

Westlake Chemical Corp. finally completed the acquisition of Axiall Corp. after an enduring takeover contest. The total consideration amounts to $3.8 billion including Axiall’s debt and creates the second largest PVC producer in North America.

Berry Plastics Group, Inc. announced the $0.8 billion acquisition of AEP Industries Inc., a producer of flexible plastic packaging films with various applications. The deal increases Berry’s North American footprint and is expected to entail cost synergies of $50 million.

Earlier this year, Reichhold Inc. and Polynt S.p.A. agreed to combine activities in a $0.8 billion deal. The new company offers a comprehensive portfolio of specialty products as plasticizers and unsaturated polyester resins and will be able to serve a wide range of customers.

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