Chemicals M&A Outlook: Where Perfect Storm Meets Perfect Opportunity

The chemical industry is currently in the midst of what can only be described as a mergers and acquisitions perfect storm.

In 2016, the US industrials and chemicals sectors had the second largest deal value (behind energy, mining and utilities) with deals totaling $520.1B. Activity levels continued to be strong in the first half of 2017, though nowhere near the rate of the same period of 2016. At the end of Q2 2017 deal value in the chemicals sector was $20.4B, down from $71B in the same period of 2016.

The majority of companies are performing well. Continued low input costs, productivity improvement and favorable interest rates are leading to strong balance sheets, improving margins, and competitive advantage in many international markets. Significant capital is on the sidelines preparing to support the right acquisitions/combinations and there seems to be no limit to the creativity or cash that can be brought to bear.

However, despite increased confidence in the economy, growth is fairly slow. This has driven a focus on inorganic sources of additional revenue, the search for greater scale, access to specific market segments and a desire to acquire innovation. This means the demand for deals is still strong with an abundance of investor money chasing relatively few assets.

According to Mario Toukan, Managing Director at investment bank KeyBanc Capital Markets, “From a transactional perspective, strategics are still paying premium multiples for good assets. Strategics are paying top dollar because of lack of organic growth. The US/North American market is still very attractive for global players, with stable growth and also fragmentation, allowing for roll-ups“ (ICIS).

Median EV/EBITDA valuations remain high, at around 11x, and strategic buyers are driving valuations even higher based on more aggressive synergy expectations as they try to fend off private equity buyers who appear to be moving on deals much more quickly in response. While the value of deals over the last couple of years has been staggering (based on the number of mega-deals announced) it will surely slow. However, the volume of deals for small and medium-sized chemical companies is likely to grow.

For CEOs, now is the perfect time to invest in programs that drive out costs, release cash and enable growth -- we call this the “triple effect“ and it's a direct result of taking a holistic, Total Value Optimization^TM (TVO) approach.

So how do chemical industry executives know if the time is right to initiate a TVO program? There are four simple questions that will help determine this:

1. Has my company taken steps to identify the untapped value in the buy-make-move-fulfill supply chain to fuel growth?
2. Has my company recently reduced baselined procurement spend by 8-12% AND seen those savings flow through to the bottom line?
3. Has my company successfully driven 5-10% out of the costs of logistics operations?
4. Has my company been able to increase throughput and improve cycle times while reducing manufacturing, inventory, and maintenance costs by 10-15%?

If you answered “no“ to any of these questions, then you have identified an opportunity worth investing in. Our experience has shown investing in these areas can net a significant EBITDA and cash improvement. Our work with a major chemicals conglomerate delivered $100M in EBITDA and $150M in cash to the bottom line. This is where perfect storm meets perfect opportunity.

Maine Pointe is a global implementation-focused consulting firm trusted by many chief executives and private equity firms to drive compelling economic returns for their companies. We achieve this by delivering accelerated, sustainable improvements in both EBITDA and cash across their procurement, logistics and operations to enable growth. Our hands-on implementation experts work with executives and their teams to rapidly break through functional silos and transform the buy-make-move-fulfill supply chain to deliver the greatest value to customers and investors at the lowest cost to business. We call this Total Value Optimization (TVO)™.

Maine Pointe's engagements are results-driven and deliver between 3.5:1-12:1 ROI. We are so confident in our work and our processes that we provide a unique 100% guarantee of engagement fees based on annualized savings. www.mainepointe.com.