Partner Ariel Levin Comments on the Private Equity Activity in Chemicals M&A

January 9, 2013 | Jonathan Shieber

“Buyout Firms Will Head to the Chem Lab In 2013”

Investment bankers, analysts and investors are predicting a busy year for buyout firms looking to invest in the chemicals industry this year.

Although 2012 wasn’t as active as some in the industry expected, insiders expect a robust pipeline this year, with investors looking at strategic carve-outs from large chemical companies and at buying smaller, independent companies.

Indeed, the match might have been struck in mid-December with the $500 million acquisition of ArrMaz Custom Chemicals Inc . by Golden Gate Capital from private equity firm Snow Phipps Group , investors said.

That deal aligns with a thesis put forth by Ariel Levin, a partner and co-founder of chemicals-focused investment bank Valence Group, that macroeconomic trends point to five main growth areas for chemical investment: food supply, urbanization, fuel efficiency and energy production, water supply, and finally, chemicals for the health-care industry.

ArrMaz sells products to companies operating in several of the related industries, namely water treatment, agribusiness, road construction and mining and minerals.

As major strategic companies look at their business lines, they are increasingly shaping their products to sell into one or more of those five major segments, Mr. Levin said.

“Looking at our clients’ strategies, they are all underpinned by a certain industry trend,” Mr. Levin said.

Those same trends will also apply to private equity firms investing in the chemicals industry, he said. Chiefly, private equity firms will look to invest in companies catering to the demands of the large corporations they see as potential acquirers. Firms will also take the opportunity to carve out the slower-growth businesses that don’t fit within the new strategic focus of corporations.

Several private equity firms, including Golden Gate Capital , are building out larger portfolios of chemicals companies. In August, Carlyle Group agreed to buy the performance coatings business of E.I. DuPont de Nemours & Co. for $4.9 billion. In November, a bidding war broke out for chemical manufacturer TPC Groupbetween First Reserve Corp . and SK Capital Partners on one side and Blackstone Group and Innospec Inc . on the other.

Overall, dealmaking was weaker than expected in 2012. Mergermarket, in its mid-year roundup, reported that mergers and acquisitions in the industrials and chemicals sector totaled $38.4 billion in the first half of last year, down 40% from $64.5 billion in the first half of 2011. Analysts tied that to uncertainty stemming from the European financial crisis, as well as slowing growth in emerging markets such as China. Some said the U.S. election was also a factor.

For many investment bankers and private equity firms, 2013 looks much better. Pent-up demand, hundreds of billions of dollars worth of dry powder in private equity funds and increasing clarity about the U.S. political and economic situation are likely to spur mergers and acquisitions in 2013, they said.

“The slowness from the past year…probably contributes to a little more optimism for the coming year,” said Leland A. Harrs, managing director and co-head of corporate finance at global investment bank PrinceRidge.

For Harrs and his colleague John P. McNicholas, the head of investment banking at PrinceRidge, this is true for both private equity acquisitions and for potential exits through acquisitions by strategic buyers.

“In a lower growth environment for public companies, mergers and acquisitions are a way to hit the growth targets,” said Mr. McNicholas.

Finally, the dramatically altered energy industry, which is forecast to see the U.S. overtake Saudi Arabia as the largest producer of oil and gas in the world within the next 20 years, is having a profound effect on the chemicals industry, bankers and investors said.

With the promise of abundant supplies of low-priced natural gas, “chemicals companies are going to be capturing higher margins,” said Mr. Harrs.

Jonathan Shieber :: Reporter
Dow Jones Private Markets Group