OUTLOOK 2016: Europe M&A blockbusters leave no spare change

Wednesday, 23 December 2015 | Jonathan Lopez

LONDON (ICIS)–Europe’s mergers and acquisitions (M&A) in 2015 were marked by two blockbuster deals which paradoxically did not have Europe as its epicentre, with Belgium’s Solvay and France’s Air Liquide acquiring US firms Cytec and Airgas respectively.

It was yet another sign of the challenging times European chemicals are going through. Both Solvay and Air Liquide did not mind paying high premiums for companies they see as providers of long-term growth and strategic importance, although they will place the focus away from their home markets.

Solvay’s blockbuster acquisition of light materials and composites producer Cytec for $5.5bn was applauded by analysts as a good fit for the European firm giving it a launch pad to enter the aerospace and automotive sectors, posed for a bright future as the need to produce lighter vehicles and aircraft using less energy becomes greater.

Air Liquide also looked overseas for its expansion projects, announcing on 17 November it was paying $13.4bn for US’ gas major Airgas, in another operation welcomed by analysts as the two firms would create the largest gas producer and distributor in the booming US market for gases.

However, pricy acquisitions such as these carried out large capital structure increases, with debt issuances which left little appetite – and money – for other acquisitions, according to Francois Lauras, vice president and chemical analyst for European corporates at credit rating agency Moody’s.

“Heightened valuations are probably one of the reasons why we haven’t seen more M&A activity. Valuations have been typically elevated and that’s probably discouraged some of the players, who had the intention to make acquisitions but were discouraged by the price,” Lauras said.

“Solvay, on its acquisition of Cytec, probably felt the strong strategic rationale justified the premium it paid for the US firm,” he added.

Away from the blockbusters, 2016 will see the trend of specialisation already observed in 2015 continue. European companies, despite lower feedstock prices and tottering performance in emerging markets, will need to continue fighting against an environment where producing commodity chemicals like plastics will invariable be cheaper elsewhere.

“During the next year the story for chemicals in Europe will remain the same  like in 2015, with more portfolio realignment to shift from commodity-volatile, lower-value upstream business, to more specialty-downstream, higher-growth type of sectors,” added Lauras.

Paul Bjacek, global head of research for chemicals at consultancy Accenture, said the M&A activity in Europe in 2016 will continue to be marked by strategic acquisitions, generally small and hardly noticed, but providing long-term added value.

“On the other side, there are acquisitions which are decided on the back of macro- economic conditions, based on the here and now and from the practical and operational standpoint. When economies perform poorly, like they are now, that decreases chemical demand and margins. Together with activist investors, the two reasons can push companies into M&A as well,” said Bjacek.

The prime example in 2015 of activist investors pushing companies into M&A activity was the transaction between US chemical majors Dow Chemical and DuPont, announced on 11 December.

Back in Europe, a specialty products portfolio realignment will also bring, according to Accenture’s Bjacek, companies trying to move into greener chemicals. He claimed although the price of crude oil continued to hit year-end new lows not registered since the 2008-2009 financial crisis, companies’ compromise with greener chemicals is firm, especially in Europe.

“A good example is [Danish toy manufacturer] Lego announcing [in June] they are going to find a replacement for its main toy component, ABS [acrylonitrile-butadiene- styrene]. They want materials which are non-petroleum based,” he said.

The push for greener raw materials and products, however, will be unstoppable in coming decades, especially after nearly 200 nations signed in December 2015 in Paris voluntary commitments to reduce their CO2 emissions.

The acquisition of Cytec by Solvay would fall into the green category as the US firm is an important producer of lighter materials for the automotive and aerospace industries, which will need to reduce their weight in order to reduce their emissions.

“That [Solvay and Cytec] deal is indicative of the sort of moves companies have been thinking about in the last years. They are bolder moves than some which were done in the past, because currently they look more into how to become as relevant as possible to your end markets,” said Peter Hall, chemical analyst at M&A consultancy The Valence Group.

“Solvay sees the deal as a way to become more eco-friendly. Cytec will bring in new products, new technologies which are very consistent with the direction Solvay wants to move into,” added Hall.

Emerging markets, which in the past few years were a focus of expansion  for European chemicals, will remain  subdued  in 2016 after the several storms witnessed in 2015, with China entering its ‘new normal’ lower-rates growth and Brazil going through a recession which has caused political and social disarray.

Although emerging economies will remain in 2016 in the sidelines in terms of M&A activity coming from European chemical companies, all analysts consulted agreed the investments made in those countries a few years ago will pay off in the long term, nevertheless, despite the current headwinds.