M&A in the chemicals sector
November 2018 | FEATURE | MERGERS & ACQUISITIONS
Financier Worldwide Magazine
November 2018 Issue
FW speaks with Steve Jenkins at Wood Mackenzie Ltd. about M&A in the chemicals sector.
FW: How would you characterise recent M&A activity levels in the chemicals sector? What factors are driving deals in this space?
Jenkins: Overall M&A activity has fallen slightly in total dollar terms over the past year. A series of major regulatory-driven divestments have been completed, but overall levels of activity remain high. Recent high-value forced sales were prompted by several very large deals which required some realignment of structure to avoid anti-competition regulations and to comply with industry regulators in specific countries. However, although mega-deals may have been a feature of the past few years, there is still a lot of interest in positioning assets and businesses in light of changing market dynamics and the search for future returns.
FW: How are valuations, multiples and other dynamics influencing the size and complexity of chemicals sector M&A?
Jenkins: Without doubt, the valuations applied to deals in recent years have been above the longer-term average. In part, this could be due to currency issues that have manifested themselves as the US unwinds its fiscal stimulus package, or, in some cases, as Brexit worries impact the value of sterling. Uncertainty over future revenues is probably a major factor in deal valuations, especially for refiners and chemical companies that are assessing portfolio restructuring in the light of slowing growth in transportation fuels, and are putting greater emphasis on securing a position in the chemical growth markets. Current buoyant market conditions are allowing sellers to obtain better valuations, although a healthy dose of realism should still be applied in many cases to avoid overpaying.
FW: Could you highlight any recent, high-profile M&A deals in this sector which exemplify the vibrancy of the market? What do these deals tell us about the underlying motivations of buyers and sellers?
Jenkins: In Singapore, ExxonMobil snapped up the business and assets of Jurong Aromatics Corporation (JAC). JAC had run into trouble soon after start-up as oil and refined product prices plummeted. The company went into receivership in September 2015. The co-location of ExxonMobil and JAC’s assets allowed for significant synergies between the two refineries, unlocking opportunities for de-bottlenecking and expanding growth in key chemical and refined products. ExxonMobil has a strong focus on manufacturing and cost excellence, seeking cost leadership in strategic business segments. This opportunity to acquire almost new assets that unlocked additional value and improved its cost position was indicative of the long-term positioning in a cyclical and sometimes volatile sector.
“In capital-intensive chemical businesses, often the quickest route to change is via divestment or M&A, rather than further capital investment to transform the business.”
FW: With the chemicals sector generally seeing a large number of activist investors, how significant has their influence been in terms of spurring deals? Does the stakeholder landscape appear more difficult to navigate?
Jenkins: In terms of catalysing change within a company, activist investors could help or hinder strategic plans that are likely in place already. Unless the company is so poorly managed and significant underperformance has been unrecognised by existing shareholders, forcing through arbitrary changes for short-term financial benefit can be problematic to the wider stakeholder group. Activism to release value in the short-term has to be questioned, whereas positive pressure to address structural issues with strategy or to address changing market dynamics may be a welcome addition to the process of managing a business. In capital-intensive chemical businesses, often the quickest route to change is via divestment or M&A, rather than further capital investment to transform the business. It is rare that activists opt for the latter course of action.
FW: What essential advice would you offer to chemical companies on approaching a deal to capture its full value-creation potential? Fundamentally, what elements are key to M&A success in this sector?
Jenkins: Firstly, really understand the business you are acquiring and do not underestimate the time, cost and effort required to unlock even the most simple value additions. Whether via merger or acquisition, the key task is getting two sets of people from different cultures and with different motivations to work together for a new common goal. Only when the organisation is aligned and motivated can real progress be made toward achieving the company’s financial goals. Secondly, do not be fooled into thinking that current strong markets will last forever. Optimism tends to blind buyers into accepting forward margin forecasts that are sometimes too rosy. And remember, if you are seeing a great market ahead, it is likely that your competitors see it too. New entrants may also take this opportunity to move into this space.
FW: How do you expect M&A in the chemicals sector to unfold in the months ahead? Are any trends and developments likely to impact transaction levels?
Jenkins: Chemicals are integrated upstream and are heavily influenced by risks and uncertainties in the energy environment. Two major trends may begin to impact industry portfolio restructuring. The first is slowing growth in transportation fuel demand. The second is an increasing focus on the circular economy, whether through recycling, regulation or substitution. Refiners now recognise that by 2030, up to 50 percent of growth in oil consumption will come from chemicals, and they are looking at crude-to-chemicals integration to secure future growth. This may lead to larger refiners actively seeking to grow their chemicals businesses without adding additional supply via capital investment in new plants, which means M&A becomes a preferred option to realign businesses for the future. The focus could be on technology and specialty companies, where sustainable advantages may be on offer for first movers, at reasonable value, when viewed over a longer time horizon.
Steve Jenkins is vice president, consulting at Wood Mackenzie Chemicals. He has over 30 years of experience in commercial and strategic analysis, assisting majors and independent companies in development, investment and commercial planning. He regularly advises businesses on investment plans, M&A opportunities, long-range business planning and asset competitiveness. He also holds a MA (Hons), Geography from Oriel College, Oxford. He can be contacted on +60 3 7954 8202 or by email: steve.jenkins@woodmac.com.
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