Chemicals: US Deals 2024 outlook

Subdued chemicals M&A poised to rebound in 2024

Deal value and volume in the chemicals industry during 2023 remained subdued, primarily due to an extended cycle of rising interest rates, heightened global conflicts and concerns about a potential recession. Weaker demand and increased feedstock costs added pressure to the profitability of chemical companies, resulting in hesitancy surrounding M&A opportunities. Nevertheless, we cautiously anticipate 2024 to be a pivotal year for chemical M&A if interest rates moderate, economic uncertainties diminish and more assets become available in the market.

Continued tight monetary policies coupled with peak financing costs have led to a recent slowdown in chemicals M&A. Megadeal activity has been minimal, with only one announced in the third quarter of 2023, and most activity occurring in the middle market. Ongoing conflicts in the Middle East and the Russia-Ukraine war further contributed to a decrease in international deal activity. European deals have been muted due to margin pressure from significant increases in feedstock costs caused by supply chain disruptions.

On a positive note, the high energy prices prompted cash-rich Middle East national oil companies (NOCs) to actively pursue downstream chemical assets, focusing on sustainability considerations and the energy transition. The aging of private equity (PE) portfolio companies is expected to bring more attractive assets to the market in early 2024. Companies may seize this opportunity to engage in transformative deals, consolidate market positions and capitalize on synergies and economies of scale. Simultaneously, divestiture of non-core assets for portfolio optimization, scrutiny of supply chains and the increasing pressure on companies to decarbonize and fulfill sustainability obligations are fundamental themes expected to drive M&A in the short term.

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Note: The primary M&A data source used in the year-end outlook is S&P Capital IQ. This is a change from our past outlook reports.​

Key deal drivers

Geographic diversification could help drive resilience and growth

Despite signs of improvement in US-China relations and an expected soft landing for the US economy, global chemical supply-and-demand dynamics remain off-balance. Elevated feedstock costs in Europe and emerging conflicts in the Middle East cast doubts on the certainty of global economic recovery. As chemical giants and PE firms increasingly view North America as the preferred destination for investment due to structurally lower feedstock costs and a deep end-market, continued capital flow into North America, particularly through M&A, is anticipated. Chemical companies will likely diversify their geographic footprint to mitigate risks and navigate changing trade dynamics, contributing to increased M&A activities globally.

Feedstock costs, sustainability requirements prompt business reinvention

Amid elevated feedstock costs, a stringent financing environment and tepid end-market demand, chemical companies are focusing on creating value through portfolio realignment and refocusing on higher-margin core operations. Simultaneously, recognizing the urgency to meet sustainability requirements imposed by various governments and the global energy transition wave, chemical companies are exploring greener assets and sources of feedstock externally. While the recently adopted EU regulation on the carbon border adjustment mechanism (CBAM) has not yet been applied to chemical companies, it is anticipated to significantly impact the chemical supply chain in the coming years. These factors are likely to lead to increased M&A activities as chemical companies continue to reinvent themselves to cope with the new normal.

Capital allocation challenges result in fewer megadeals

In recent months, investors have responded to the Federal Reserve's plan to maintain higher rates for an extended period, resulting in a tighter financing environment in 2023. Constructing megadeals, particularly for private equities, has become extremely challenging. Although most chemical companies emerged from the pandemic with a strong balance sheet, they are cautiously monitoring end-market demand and pricing dynamics as margins are squeezed in certain subsectors. Cash-rich Middle East NOCs are exceptions, contributing significantly to activities globally. On the sell-side, while public market valuations modestly recovered in several major countries, it is still not an ideal climate for PE-backed chemical companies to pursue an IPO exit. The aging of portfolio companies held by PE firms is expected to fuel a rebound in deal activity in the coming quarters as new assets enter the market, and previously stalled sale processes resume.

“While chemical M&A activity scaled back in recent months amid geopolitical tensions and a stringent financing environment, there is cautious optimism of a rebound in 2024.”

— Craig Kocak, US Chemicals Deals Leader
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