Chemicals deals insights: Midyear 2020

The COVID-19 pandemic puts Chemicals industry deal activity on a temporary hold in H1 2020.

The global chemicals industry is feeling the impact of the COVID-19 crisis from every direction, spanning across supply chain disruptions, demand drop due to uncertainty in the global economy and challenges of keeping a large workforce safe in a manufacturing environment.  As a result, H1 2020 deal volumes dialed back to slightly lower than historical averages and deal value dropped significantly from 2019. The only mega deal announced in H1 2020 was the contemplated $5B acquisition of BP’s Global Aromatics and Acetyls business by INEOS.  

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Chemicals deals activities started on a strong note in January with the creation of the new Syngenta Group, one of the largest agricultural chemicals companies in the world, before taking a dive amid the COVID-19 pandemic. Numerous deals have been postponed or terminated in H1 2020 as investment theses are no longer valid for existing deals under current financing environment and economic situation; although a glimpse of hope became visible toward the end of Q2.

The global pandemic will have a broad and lasting impact on people’s ways of being, resulting in profound changes in the global economy and M&A environment as outlined in PwC’s publication Tomorrow’s deal dynamics: The road ahead. The chemicals industry is certainly not immune. In this landscape, chemical deals activity will look different going forward.

Consolidation and value creation: With the global economy going into a recession and people’s mobility being limited in the years to come, we expect certain end markets will face a prolonged decline in demand. Productivity and operational efficiencies will also be impacted due to the priority to of promoting a safe and secure environment for the workforce. These factors are expected to drive further consolidation as companies focus on core portfolio growth, opportunities arising from distress situations, divestitures of non-core assets and post-deal value creation to improve return on investment. This is more evident in the Commodity Chemicals and Agricultural Chemicals sub-sectors with the recently announced INEOS/BP deal and Dow’s divestiture of railway hubs to Watco.

Innovation driven: The trajectories of the demand of many end market applications of chemical products have been altered, presenting both challenges and opportunities. Innovation driven deals will start to play a more important role in forming a new inorganic growth strategy including asset-light technology acquisitions or even cross-industry deals by chemical giants. This is particularly relevant for the Speciality Chemicals subsector.

Cross-border deals: As a result of the continued acceleration of decline of globalization and the hard lessons learned of the vulnerability of the global chemicals supply chain, chemical companies may use cross-border deals as a way to realign their footprint and supply chain in each of the major countries in which they operate. Due to the capital intensive nature of chemical operations and long lead time to quality suppliers / sources of feedstock, we expect the strategic reposition will continue driving robust cross-border deals activities in the next few years.

Private equity: With trillions of dry-powder, private equity (PE) has been sitting on the sideline with concerns of high valuation of target assets. The unexpected global pandemic and recession will present opportunities for PEs to look for attractive assets with reasonable or even depressed valuations. History shows PEs with chemical industry focus and capable of unlocking value through operational improvement can see higher returns than their peers.

Capital markets: While small privately held chemical companies may battle for liquidity, global chemical giants saw robust availability of capital through equity and debt markets in the current monetary policy environment. This will further strengthen their ability to make strategic acquisitions and drive a robust M&A market in the next few years once they stabilize their operations.

In summary, an inorganic growth strategy focusing on deals may become even more vital for chemicals industry players to succeed in the current global health crisis and economic downturn. With ample capital available, chemical deals activities are expected to rebound prior to a full recovery of global economy.