The Valence Group Global Chemicals M&A Conference
Wednesday, 14 September 2016 | Will Beacham | ICIS Chemical News
NEW YORK (ICIS)–Current record levels of global chemical industry mergers and acquisition (M&A) activity will continue, fuelled by availability of cheap capital and the need to drive growth, according to Peter Hall, partner at investment bank The Valence Group.
Speaking at The Valence Group M&A Conference in New York, Hall said chemical industry M&A activity could even surpass $200bn in 2016 as companies look to increase growth and profitability against an unspectacular macroeconomic background.
Speaking on the day that Bayer confirmed a $66bn deal to acquire Monsanto, he said: “So far, 2016 has been incredibly strong. The burning question in everybody’s mind is whether this level of activity can continue at these [earnings before interest, tax, depreciation and amortisation (EBITDA)] multiples. There is no logical reason to think this level of activity at these multiples will change.”
One key reason for the M&A surge is a decline in the long-term cost of capital, and this should remain low for the foreseeable future. Availability of capital has also increased strongly and should remain buoyant. “Like every commodity the more of it there is, the cheaper it gets. Absent a completely unexpected shock there is no reason to think this will change any time soon.”
Valence estimates that amongst publically listed chemical companies there is at least $150bn of cash sitting on balance sheets, up from $120bn three years ago. This is despite a significant amount of share buyback and cash acquisitions.
The private equity sector had around $500bn of unspent capital at the beginning of 2015. Since then another $200bn has been raised. “There is a huge wall of PE capital looking for investment. The chemical sector remains fragmented with many logical consolidation opportunities,” said Hall.
Valence analysis shows that EBITDA growth is the most important factor driving chemical sector valuations. However after years of cost-cutting across the sector, there are not so many opportunities to drive EBITDA growth using that method.
Realising synergies from a deal is now more important than cost-cutting: “The industry has become pretty expert at extracting synergies. The Bayer/Monsanto deal targets around 10% of sales as synergies. Synergies from M&A are probably the single biggest way to drive EBITDA growth and therefore value creation,” said Hall.
Valence estimates that typical synergies of 7% of target revenue are now regarded as normal.
He pointed out that if a company can achieve 7.5-10% EBITDA growth from M&A synergies that equates to two to three years of what could be obtained from normal topline growth: “That is where the real value creation opportunity exists in the sector at the moment.”
Chemical industry deal valuation multiples have moved up from around 10X EBITDA to 15X and, said Hall, this is a permanent shift.
“In our minds 15X is the new 10X. Five years ago 10X was the maximum. Realistically now you’re looking in the mid-teens if you’re targeting an attractive asset.”
Hall said that whereas other industrial sub-sectors are seeing a downturn in M&A activity, the reverse is true for chemicals where it is now proven to be an important way to create growth and value.