Chemicals and materials deals down from 2019 highs but recovery is on the way

While COVID shut the window on deals in H1 2020, Q3 saw a revival that augurs well for the rest of the year and beyond

In recent years, global M&A in the chemicals and materials sector has been breaking new records. Last year saw the highest value on record (US$254.6 billion), while 2018 delivered the largest number of deals since 2006 (545).

The first half of 2020 saw a major COVID-induced drop-off—value was down by 83% (to US$28 billion) while volume (154 deals) dropped by 25% compared to the same period in 2019. However, Q3 has seen something of a turnaround in fortunes. There were 97 deals worth US$23.8 billion—a quarter-on-quarter rise of 35% and 117% respectively.

Asia rising

The largest chemicals transaction of the quarter (and of the whole year) saw Japan’s Nippon Paint purchase Singapore’s Wuthalem for US$12.2 billion in August. Not only is this one of the largest overall Asian deals of the year but, once again, sees a Japanese company embarking on a cross-border adventure—a growing trend in recent years.

As the company said in a statement at the time of the deal: “Asia is becoming a key region for the company’s sustainable growth in terms of both market size and growth rate due to its projected demographic and economic growth leading to increasing demand.” In the past year, Asia has been the dominant geography in the sector with three of the top four bidders coming from the area.

Volume-wise, China has been the main M&A player in the sector this year, with 77 deals in the first three quarters of 2020—accounting for 30% of the global share. The largest Chinese deal this year saw Yanzhou Coal Mining Company acquire assets from Yankuang Group for US$2.7 billion.

Overall, Asian deals have pulled in US$22.9 billion so far this year—accounting for nearly 44% of total value for the sector.

Journey to the core

The rationale behind the deal for Yanzhou was to integrate their coal chemical business and optimize their core business. The latter point is a trend among large companies to move ahead with divestments of non-core assets. This has played out in a number of large transactions so far this year, including the third-biggest of the year, which saw UK giant BP sell its petrochemical business to its compatriots Ineos for US$5 billion in June.

BP CEO Bernard Looney said at the time of the sale: “Strategically, the overlap [of the petrochemical business] with the rest of BP is limited and it would take considerable capital for us to grow these businesses.”

The West wanes

Despite deals such as the BP/Ineos and Austrian oil and gas company OMV’s US$6.4 billion acquisition of a 39% stake in chemicals firm Borealis (the second largest of the year), chemical and materials M&A in the West has fallen behind its Eastern rivals.

Western Europe has seen a particularly sharp fall in deal volume, from 119 deals in the calendar year 2019 to only 64 in the first three quarters of 2020. The US has also seen a drop in deal numbers, from 96 for calendar year 2019 to 53 for Q1-Q3 2020. The most striking statistic is probably the spectacular fall in US deal value, from US$119.7 billion in 2019 to just US$6.4 billion in Q1-Q3 2020.

The especially steep slides in the US and Western Europe in 2020 reflect the ongoing coronavirus crisis, whose disruptive effects have lasted longer than in China and some other Asian countries. This has not only given dealmakers pause, but also made it physically difficult to hold meetings, visit sites and undertake the due diligence required to do deals. Moreover, economic growth has contracted particularly sharply across these regions.

Headwinds and potential sunny spells ahead

Looking ahead, there could be further clouds on the horizon for the chemicals and materials industry. Consumers, shareholders and governments want to reduce the environmental ill effects of the full range of chemicals and materials. This pressure is greatest perhaps for petrochemicals.

On balance, however, current conditions could lead to almost as many opportunities, as manufacturers look for more environmentally friendly materials such as bioplastics—plastics made from natural materials such as algae. Companies anxious to divest themselves of chemicals and materials assets with a high carbon footprint will prompt M&A activity as they spin these divisions off to willing buyers.

A prolonged global recession would on balance continue to hit demand for chemicals and materials, and therefore M&A, even if there is some deal activity to strengthen balance sheets and the core business along the lines of the BP deal. However, a recession would only temporarily suppress the urge to do deals, which is never far below the surface.

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