News from The Valence Group Chemicals M&A conference: Specialty Chemicals to Drive M&A

As emerging-market chemical groups expand their portfolios downstream, established companies are being squeezed and turning to specialties for growth

Wednesday, 2 December 2015 | Will Beacham, Joseph Chang & Stephen Burns

The current boom in chemicals mergers and acquisitions (M&A) will continue for the next five to 10 years as companies seek to secure growth by buying into specialty chemicals, according to US investment bank The Valence Group.

With low growth in mature markets and slowing emerging economies, companies that want to secure faster growth and higher margins will seek acquisitions in specialty-chemicals markets, according to partner Anton Ticktin.

Speaking at The Valence Group / ICIS M&A Conference in New York on 27 October, he said: “In the medium-to-long term, what’s driving the market is the need for growth, which is currently difficult to find. There is a structural change, which is pushing almost everyone downstream.”

Chinese and Middle Eastern producers are expanding their portfolios downstream from base commodity chemicals and encroaching on and taking market share from established players in mature markets. This is forcing players in Japan, Europe and the US to move further downstream, said Ticktin.

According to Valence analysis, there have been almost twice as many large ($750m-$1bn – €690m-920m) specialty chemical deals in the past five years as there were in the previous 10.

“We’ll see more $1bn-plus specialty chemicals deals and more consolidation in the specialty chemicals field – the market will look very different. Companies want to get larger to prevent themselves from becoming acquisition targets,” he said.

Despite the current macroeconomic turmoil, this year will be the second strongest on record for chemicals M&A after 2007, according to Valence Group analysis.

There have been around 15 $1bn-plus deals per year for the past five years. Trading multiples and transaction values have also risen to a high point and are likely to remain elevated, driven by strong demand.

The Valence Group chemicals sub-sector index shows that the majority of industry segments have enjoyed increased valuations, with particularly strong performances from compounding, pharmaceuticals and agricultural inter-mediates, as well as food and feed ingredients.

“Low interest rates, activist investors and CEO confidence have all contributed to the current boom. The industry has restructured from being volume and scale driven to being much more value and profit driven,” he said.

Profit growth and profitability in specialty and performance chemicals has outstripped commodities and intermediates over the past 20 years. As the sector has consolidated and gained extra scale, that profit growth has accelerated, according to Ticktin.

Valence analysis suggests that chemicals M&A for the next five to 10 years will be focused on 15 segments, including water treatment, personal care, agrochemicals and fine chemicals, where higher profitability and protection from emerging-market competition will be greatest.

“Private equity has been squeezed out by corporates, but we think it will come back. Private equity players will team up with strategic buyers to buy larger assets. There is a wall of money among private equity and strategic buyers which has to go somewhere,” said Ticktin.



Companies viewing organic growth as a low-risk proposition while eschewing M&A as high risk may be misguided, the head of the private equity firm PEAK Investments said at the conference.

“Many view a focus on organic growth as a non-risk environment. But in many cases, two-thirds of R&D efforts are unsuccessful. I would submit that organic growth is just as risky, if not more than M&A done properly,” said Mike Boyce, PEAK Investments chairman and CEO.

Some of PEAK’s investments include specialty silicas producer PQ Corp and the former Solvay Eco Services sulphuric acid regeneration business.

In making acquisitions, it is as important to define what you want to accomplish as what you do not want to do, he said. “We said we wouldn’t compete with China, would not invest in a business with big peaks and troughs, and would not take on environmental issues,” said Boyce.

In the 1990s, Boyce and his partners bought up a $30m salt business in Kansas, and rolled it up with 15-16 acquisitions over four years into a $1.1bn inorganics company, now Compass Minerals, he noted.

Today, Boyce sees further opportunities to roll up companies – in the form of corporate orphans, or businesses with $100m or less that are non-core parts of larger companies, as well as family-owned businesses, and particularly in the inorganics space.

Valuations that buyers are willing to pay should be based less on the past 12 months’ results, and more on what a buyer can expect to generate in the future, he said.

One of the most important lessons learned is to “always have a 100-day plan”, said Boyce.

“In those first 100 days, you have a licence to make changes. Employees as well as bankers expect that. Let that opportunity go, and the baton is taken away from you fairly fast,” he added.

As an expert on the inorganics industry, he noted that there are still opportunities for private equity firms to make roll-ups in the titanium dioxide (TiO2) sector.

However, he noted that the debt structure of any deal and timing are critical as TiO2 is beset by peaks and troughs.


US-based coatings company PPG Industries will continue to employ acquisitions to supplement organic growth, its executive chairman said at the conference.

“While we may not see as many big transactions, there are lots of opportunities as less than 50% of the coatings industry is in the hands of the top 10 players,” said Charles Bunch, executive chairman of PPG Industries.

PPG has around a 15% global market share in coatings, he noted.

Aside from coatings, which represents around 95% of PPG’s over $15bn in sales, there are M&A opportunities in adjacent businesses such as adhesives and sealants and pre-treatment chemicals – “specialty chemicals that fit”, said Bunch.

Earlier this year, PPG acquired REVOCOAT, an automotive original equipment manufacturer (OEM) adhesives and sealants business primarily based in Europe, he noted.

As for its North American flat glass and global fibreglass assets, which are still a $1bn “less core” business, PPG is open to a divestiture, but “at the right value”, said Bunch.

With coatings already 95% of PPG’s portfolio, there is less pressure to divest, giving the company time to evaluate the right offers, he said.


US-based Chemtura’s divestment programme in 2013 and 2014 succeeded in delivering value to shareholders, but the shoe is now on the other foot.

With Chemtura’s portfolio transformation now complete, “we are agnostic – we can buy, sell or merge”, said chairman and CEO Craig Rogerson.

But the company would not go for “just any deal” and management must be able to explain to its shareholders why it makes sense for Chemtura to own the asset, Rogerson said.

On the other hand, any further divestments might create “dis-synergies” and leave Chemtura too small in scale to perform as a public company, he said.

Chemical company managers and their investment bankers should be mindful of the opportunities presented by unforced divestments, even though these might not be as “sexy” as growth via acquisition, Rogerson said.

Rogerson stressed that the responsibility of company managers is primarily to deliver value to shareholders. Chemtura’s record on improving its share price as it emerged in 2010 from a Chapter 11 bankruptcy protection was built around three main divestments.

These were an antioxidants business sold to SK Capital for $200m in April 2013; a consumer products unit sold to KIK Products for $300m in December 2013; and Chemtura AgroSolutions, which was sold to Platform Specialty Products for $1.0bn in November 2014.

Rogerson acknowledged that the consumer products unit was “sold a year too late” in terms of the optimum market conditions.

From the proceeds of the sales, $800m has been spent on share repurchases, at an average of $22/share.

SPAC TO THE FUTURE – Joseph Chang New York

There is a relatively new player in the chemical M&A game – the special purpose acquisition company (SPAC). A publicly traded SPAC is an acquisition vehicle where a sponsor team raises a blind pool of cash from investors to acquire assets. By buying shares in a SPAC, public investors can invest alongside industry experts (the sponsor team), and realise value through a publicly traded vehicle they can sell at any time.

“The SPAC structure gives investors access to top-tier management that is highly incentivised to generate excess value through sourcing private equity opportunities,” said Jeff Quinn, founder and chairman of Quinpario Acquisition Corp 2 (QPAC 2). Quinn is the former chairman and CEO of Solutia, which was sold to Eastman Chemical in July 2012.

In January 2015, QPAC 2 raised $350m in an initial public offering (IPO). It is seeking deals in specialty chemicals and performance materials, but has yet to make a deal.

“With $350m in equity capital, we can do a transaction in the $750m-$1.5bn range. We can use debt financing, or sellers can roll equity into the deal,” said Quinn. “We can do up to $3-4bn if we have a big seller rolling equity into the transaction.”

One example of a successful chemical SPAC that Quinn noted is Platform Specialty Products, which started as Platform Specialty Acquisition Corp on the London Stock Exchange in May 2013. After acquiring US-based electronic chemicals firm MacDermid in October 2013, it relisted on the New York Stock Exchange in January 2014 under its current name.

Platform subsequently acquired Chemtura’s AgroSolutions business in November 2014 and Arysta LifeScience in February 2015 and is now teaming up with private equity firm Apollo Global Management to buy out OM Group.