Chemicals companies were a big win for dealmakers in the first quarter, posting their best ever start to a year as volume more than tripled from the year-earlier quarter to $71 billion, fueled by transactions in the agricultural segment of the industry.
The biggest combination of the year so far -- China National Chemical Corp.’s $43 billion offer for Swiss agri-chemical company Syngenta AG, was the main contributor to the jump. The chemicals industry represents about 11 percent of first-quarter deal volume of $622 billion across all industries, according to data compiled by Bloomberg.
“Growth in the chemicals sectors has slowed slightly this year and last, so companies are trying to figure out the next step,” said Jan-Philipp Pfander, head of chemicals for Europe, the Middle East and Africa at Moelis & Co. “This is driving the appetite for M&A.”
Activist investors and lower oil prices, along with slower growth prospects, also mean that companies are aggressively reevaluating and divesting marginal assets to improve their returns and focus, Joachim von Hoyningen-Huene, a partner at AT Kearney, said in an interview, citing a report by the firm.
In the first three months of 2016, agricultural transactions accounted for $47.3 billion, or about 67 percent, of the total volume of deals in the first quarter.
Sherwin-Williams Co., the largest U.S. paint retailer, agreed last month to buy rival Valspar Corp. for about $9.3 billion in cash to become the world’s biggest coatings maker. WL Ross Holding Corp., the investment vehicle run by billionaire Wilbur Ross, said in March it will buy Nexeo Solutions Holdings for about $1.65 billion to use as a base for acquiring other assets in the fragmented chemical-distribution industry.
“A lot of M&A is being driven by strategics that are looking at the next step in consolidation,” Pfander said. “Companies are contemplating which businesses and technologies they’d like to have and in which regions they’re underrepresented.”
Several mid-sized chemical companies are looking for deals. Clariant AG Chief Executive Officer Hariolf Kottmann in February said mergers and acquisitions play an important role in the Swiss chemical-maker’s strategy. Evonik Industries AG, Germany’s second-largest chemical company which has been scouring for deals, has held talks with several U.S. companies including Air Products & Chemicals Inc. about buying its material technologies unit, people familiar with the matter said in January.
The Syngenta deal epitomized another across-the-board trend in M&A: cash-rich Chinese companies embarking on their own version of globalization to lock up supplies of commodities and raw materials, as well as key technologies and consumer services and products.
ChemChina’s bid for Syngenta left Monsanto Co. out in the cold after it tried, and failed, to buy its Swiss counterpart. Monsanto also stood by as the Dow Chemical Co. merger with DuPont Co. was announced and now finds itself with few options as competitors consolidate. The company may do something yet: Monsanto has explored possible deals with BASF SE and Bayer AG, people familiar with the matter have said.
Top slots in the first-quarter league tables were dominated by banks on the ChemChina-Syngenta tie-up. Goldman Sachs Group Inc. and JPMorgan Chase & Co., two of the banks advising Syngenta, ranked first and second, respectively, according to data compiled by Bloomberg. UBS Group AG, which also advised the Swiss company, ranked sixth.
On the other side of the Syngenta deal, Credit Suisse Group AG ranked eighth in the league tables, while HSBC Holdings Plc came in 12th.
That deal also propelled two Chinese banks advising ChemChina into the top 20 advisory positions: China International Capital Corp. ranked 11th, while China Citic Bank Corp. followed at 14.
Some of the upswing in early 2016 is a hold-over from the all-stock merger of Dow Chemical and DuPont, announced as the year drew to a close. Not only does that kind of deal -- creating a chemical behemoth valued at about $130 billion -- put pressure on competitors to consolidate, it may also result in more transactions.
Dow and DuPont are planning to re-form as three independent operating companies to address antitrust concerns, but regulators have taken a tough stance on big deals and divestitures could be in the works. Other chemical companies are divesting non-core businesses.
“Some corporates are taking advantage of appetite among buyers by selling smaller and less profitable businesses,” Moelis’s Pfander said.
Honeywell International Inc. is considering exiting its business that makes chemicals for manufacturing nylon, people with knowledge of the matter said this week. BASF agreed in February to sell a coatings business to Akzo Nobel NV for 475 million euros ($541 million).
Private equity firms, which have hired industry executives to drive dealmaking in chemicals, are struggling to get a place at the table.
“Large corporate strategic deals drove the M&A market in 2015,” Samuel Feinstein, a partner at Apollo Global Management LLC who oversees chemical investments, said in the AT Kearney report. “In general, we found it challenging to identify good chemical assets at attractive-enough valuation and risk-return levels for the funds we manage.”
Apollo started investing in chemical companies more than 15 years ago, and investments have included LyondellBasell Industries NV and Taminco.
“We will continue to see a significant amount of corporate strategic transactions,” Feinstein said in the report. “I also expect a meaningful number of non-core asset divestitures, like carve-out transactions, which are a hallmark of Apollo’s private equity investment history.”