Chemical industry M&A activity has remained strong despite trade tensions and fears of economic downturns, suggesting that investors in the industry have become more comfortable with uncertainty.
The Deloitte Global Chemical Industry Mergers and Acquisitions Outlook (2020 Outlook) expects robust merger and acquisition (M&A) activity to continue throughout the coming year, despite the trade and geopolitical tensions, and slowing economies that shape today’s global economic uncertainty.
“Over the past few years we watched attentively as the chemical industry maintained healthy M&A activity levels despite the many challenges,” says Bart Cornelissen, Energy & Resources Leader and Managing Partner of Monitor Deloitte in the Middle East. “The focus has remained on growth and profitability through it all. It seems that the chemical industry has become more comfortable operating in the uncertainty which may now be considered the ‘new normal’. Given the drive by GCC oil and gas companies towards downstream, we expect to see inorganic growth as essential to deliver upon their strategies.”
One trend the 2020 Outlook sees shaping the M&A landscape is the continued integration of traditional oil and gas companies with petrochemical firms, as chemical production is becoming an increasingly important end-use. Another trend is increased sustainability concerns that are changing how chemical companies view their business models, leading to non-traditional alliances, partnerships, and joint ventures.
Private equity has experienced a resurgence since 2018 as an important component of acquisition transactions. Private equity groups are expected to play a renewed critical role in chemicals M&A by providing capital, acquiring assets, and building companies through consolidation.
“The global economy appears able to support continued M&A activity, and the fundamentals for M&A activity in the chemical industry in particular continue to be strong as well,” says Cornelissen. “Companies are searching for growth and a larger global footprint, along with efficiency in their operations and innovation in their solutions. There are many opportunities to create value through M&A.”
"The ongoing monetization of domestic assets in the Middle East will continue to support the diversification of portfolios to international markets, with the benefit of further securing long term product placement," said Lawrence Hunt, Partner, M&A Consulting, Deloitte Middle East.
The following are snapshots of M&A activity by geography, as outlined in the 2020 Outlook:
· The United States remains the most active market for M&A transactions. Foreign buyers remain very interested in US assets, and portfolio management will continue to be an important theme for US companies.
· China is home to the world’s largest base chemicals capacity, and given the current adjustments in the Chinese economy there may be acquisition opportunities for foreign buyers, although not at a bargain.
· In the United Kingdom, Brexit uncertainty undermines business confidence, and M&A activity has been relatively flat. Expect continued caution, even though debt is inexpensive and potential players have cash to deploy.
· In Germany, growing concerns around a possible economic downturn could lead to a mild slowdown in M&A activity, especially as regulatory scrutiny has tightened significantly in Europe.
· India has a strong long-term growth outlook and has made a variety of tax and regulatory reforms friendly to the chemical industry. The industry is also enjoying increased domestic consumption across all sub-sectors.
· In the Netherlands, the economic climate remains strong, debt is inexpensive, and many companies have had strong earnings in recent years. However, disappointing earnings and uncertainty could challenge chemical M&A activity in the Netherlands.
· In Japan, many leading chemical companies saw a downturn in 2019 for a variety of reasons. Nonetheless, companies have a need to accelerate portfolio transformation, and M&A ambitions are projected to remain high.
· Brazil should see growth in M&A activity due to several economic factors, including chemical plant profitability and low interest rates. In addition, the Brazilian government’s privatization agenda may help drive deals.
- Ends –
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Nadine El Hassan
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Deloitte Middle East
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