3 minute read 21 May 2019
Chemists working scientific research laboratory

Where the next wave of consolidation in the chemicals sector could occur

Authors

Frank Jenner

EY Global Chemical Industry Leader

Visionary in markets and business development for the chemical industry. Enjoys race boarding in the mountains. Enthusiastic golfer.

Jens-Christian Fritz, CFA

EY Head of Origination for Germany, Switzerland and Austria

Strategic thinker in M&A, strategy and corporate finance. Skilled in investment banking and business development.

3 minute read 21 May 2019

Analyzing 15 years of past data might be the key factor to find the next wave of M&A consolidation in the chemical sector.

Companies are engaging in M&A activities more and more. And many in the chemicals sector are trying to predict where this increased M&A activity will occur, and how it may continue in the future.

At EY, we reviewed the strategic rationale behind large chemical transactions that have taken place over the last 15 years to predict the trends that drove these deals.

Three points became clear:

  1. Companies with expected lagging financial performance are more likely to conduct M&A activities than are companies with strong growth and profitability characteristics.
  2. Companies with below-par financial performance are more likely to pursue transformational transactions.
  3. Companies with top-line growth and profitability potential are under increasing strategic pressure to pursue large, transformational transactions.

Says EY’s Jens-Christian Fritz, CFA, Transaction Advisory Services and Head of Origination for Germany, Switzerland and Austria, “Growth and profitability are what’s putting M&A on the C-suite agenda, particularly at companies that are struggling more than average in financial performance.”

Chemical industry transactions

Over the last 15 years, the global chemical industry has experienced a significant increase in M&A activity. The number of transactions with a value over €3 billion was approximately three times as high as in the preceding 15 years (1988–2002).

These transactions were a direct result of:

  • Product expansion into higher-margin segments. The geographic focus of such transactions was driven by the respective end-market profile (e.g., electronic chemicals in Southeast Asia).
  • Geographical expansion. Targeted geographical expansion often took place in growth regions such as Asia-Pacific and Eastern Europe.
  • Market share gains. These gains often took place in more mature regions, including Western Europe and North America.

There was a regional influence in transactions as well. Most of the large transactions happened in mature regions, such as US, Western Europe and Japan. Growth regions, such as China, India, Thailand, Indonesia, South Africa and Eastern Europe, also saw these kinds of transactions.

Further, transaction numbers went up in selected chemical subsegments, including in adhesives, petrochemicals, and paints and coatings subsectors. The most recent transaction clusters took place between 2016 and 2018 in the agricultural and industrial gas subsectors.

Growth and profitability are what’s putting M&A on the C-suite agenda, particularly at companies that are struggling more than average in financial performance.
Jens-Christian Fritz, CFA
EY Head of Origination for Germany, Switzerland and Austria

The expected slump in chemical transactions

While the number of deals have increased, most recently-acquired entities have underperformed on the S&P 500 Chemicals Index within the first year after announcing the transaction. Also, slowdown macroeconomic and geopolitical reasons are expected to briefly slowdown M&A activities in the sector.

However, considering that companies are continuing to seek out high-growth and high-margin segments, the frequency of these activities is expected to be back on track in the long term. Companies that have registered low growth and low profits in the past could risk falling behind the competition in finding more deals.

These companies need to develop strategies that could improve their growth and profitability. For the same reason, we also expect them to play a major role in the next wave of consolidation in certain chemical subsectors.

Transaction attractiveness of chemical subsectors

Companies that require large, transformational transactions can be identified on closer analysis. At the same time, it is important to identify the chemical subsectors where increased M&A activity may take place.

 Three important metrics help drive the attractiveness of subsectors:

  • Growth prospects of each subsector
  • EBITDA margin levels
  • Asset intensity of each subsector

Considering these metrics, we expect that subsectors such as food ingredient chemicals, personal care chemicals, construction chemicals, and paints and coatings to fall behind the broader sector. Therefore, these subsectors have potential for increased M&A activity in the near future.

However, before starting on this path, companies need to equip themselves with advanced technologies and innovations, which could extend the specialty product life cycle.

Summary

Companies expecting to predict the next wave of consolidation in chemicals need to begin exploring new locations, markets and product categories to achieve both growth and profitability. They should also be focusing on improving their business offerings with the help of strategic transactions. 

About this article

Authors

Frank Jenner

EY Global Chemical Industry Leader

Visionary in markets and business development for the chemical industry. Enjoys race boarding in the mountains. Enthusiastic golfer.

Jens-Christian Fritz, CFA

EY Head of Origination for Germany, Switzerland and Austria

Strategic thinker in M&A, strategy and corporate finance. Skilled in investment banking and business development.