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Partner Yuan Peng Interviewed for the Chinese Daily, The Morning Whistle

The Impact of Shale Gas Revolution on Global Chemical M&A Trend

March 2, 5:35 pm | By Kang Xiaoxiao and Tuo Hui

Click here to read full article at www.morningwhistle.com

Exclusive interview with Ms. Peng Yuan

Yuan Peng, China-based partner of Valence Group told Moringwhistle.com that in 2012, the Valence team completed 11 M&A deals in the chemical industry, ranking No 1 among global investment banking peers. The total transaction value of 7.4 billion US dollars ranked Valence top five on the league table. Most of the completed projects were mid-cap deals,with the largest one worth US$ 4.7 billion.

The Valence Group, founded in 2007, is a boutique investment bank focusing on chemicals and materials industries; this firm offers M&A advisory services exclusively to companies and investors in the chemicals, materials and related sectors. China-based partner Yuan Peng, said that the value of investment boutiques is that they can provide independent advice and by focusing on one field, they can provide more specialist M&A services for clients.

The four founding partners have worked together at chemicals M&A team of Bear Stearns. Before they established Valence, they had the common view that the clients of chemicals industry need specialist advisors who have a profound understanding of the industry.

The Valence team comprises not only excellent senior investment bankers with many years of experience in chemicals but also former executive officers of well-known chemical companies as well as chemistry doctorates and industry experts.

Global Chemicals M&A Situation 

Moringwhistle: Looking back to global chemical M&A situations in 2012, what are the typical features?

PENG Yuan: The chemical M&A market was very active in 2011. In comparison, the overall activity (including transaction volume and value) has somewhat declined in 2012. The decrease in transaction value is greater than that in volume, which means the per transaction size was smaller in 2012. The number of deals worth over 1 billion dollars has decreased, while the share of smaller deals (ranging from 100 million to 500 million dollars) remained the same.

In fact, every year there are only a few deals worth over a billion dollars. These can only take place between multinational corporations, and represented only about 2% of the total number of transactions; the proportion in terms of value is slightly higher. Larger scale deals (from 500 million to 1 billion dollars) accounted for a small portion of the total deal volume as well, and deals worth 100 million to 500 million dollars accounted for 5%-10% or more. In addition, there aome of them were not disclosed.

Morningwhistle a large number of transactions less than $100 million each. Since these transactions are small, What are the features of China’s chemicals M&A market?

PENG Yuan: From the view of inbound acquisitions, our international clients are very interested in Chinese enterprises across nearly all industries. Such eligibility conditions as quality and price used to be the biggest hurdles for Chinese companies from being sold to multinationals. But right now, we think timing is about right. In terms of quality, Chinese companies previously operated on a smaller scale and the production facilities and capabilities were not up to international standards, not to mention some compliance issues. But Chinese companies have been improving rapidly. The production scale, quality and management standards have all improved and are now able to meet the standards required by international companies looking for acquisitions in China.

On the other hand, the secondary and IPO markets were both very weak last year. For most companies, the prospect of IPO, whether as an exit strategy or financing option, was not quite unclear. Under this circumstance, some owners of businesses, intend to use M&A as an exit option. For instance, Carlyle exited Sinorgchem by selling it to Sinochem last year.

China's Chemicals M&A Opportunities and Trend 

Moringwhistle: What are the features of the Chinese chemical industry's supply chain?

PENG Yuan: The chemical supply chain is very long. The lower reaches of the chain, such as coating and coating additive, and even some upper stream of the chain, are competitive sectors with many players. It is not necessarily dominated by state-owned enterprises. In contrast, state-owned giants like Sinopec and CNPC control the oil and refinery market as well as the raw materials such as ethylene and propylene that are integrated with the refinery. As you go down the supply chain, more competition occurs.

Moringwhistle: How would you evaluate the overseas M&A ability of China’s private enterprises?

PENG Yuan: Based on our own experience, Chinese private enterprises have made a lot of attempts, but only a few deals of larger value have been disclosed. China's private enterprises have accumulated M&A experiences in previous years; it is like a step-by-step education process. Many Chinese firms may not have been able to keep pace with competing bidders on their first M&A deal. But after several attempts, they become more and more mature. We feel that these firms now have the ability to make overseas acquisitions, and just need to wait for the right opportunity and timing. China's private enterprises are continuously gaining M&A experience and we think they will soon see breakthroughs in the chemicals industry.

I think China’s firms have been improving well in the following aspects: first is capability, second is their understanding and knowledge of international operations. Third is skill – how to successfully acquire a target company, tactics and techniques, including competent working team as well as understanding of the target’s procedure and culture.  

Moringwhistle: What are the impetuses of China’s enterprises to do overseas M&A?

PENG Yuan:There are some common driving factors, including the demand for technology and access to international markets.

China’s firms usually have two ways to improve their technology. One is self-dependence, but that is time-consuming. When you manage to improve your own technology after 10 to 20 years, the technology of your international peers may have improved as well, hence the question of whether you can catch up . Another way is to acquire an existing company with the desired technology. This is a good way to take the leap to command international leading technologies.

The globalization of chemicals industry has become evident. Through overseas M&A, a company not only becomes an international manufacturer with a global brand and international customers, it is also able to enhance its image and promote its product in the domestic market. For example, a company with international capability would be better positioned to supply such international companies as L’Oreal Group, which sells their products globally including in China.

Moringwhistle: In the future, what will be the trend of China’s private enterprises overseas M&A?

PENG Yuan: In the near future, the volume will increase and either the single or average transaction value will rise up too. Though the economic environment and new policies may affect overseas M&A, some trends are definite. There will be two industry specific trends.

One industry trend is consistent with the macroscopic trends. People now pay close attention to environmental issues, especially as it has caught the attention of the new leaders and has been included in the 12th Five Year Plan. So in the environment related sector, for example, companies involved in water treatment, air cleaning and the reduction of waste gas in the production process have an incentive for M&A. Moreover, people are increasingly paying attention to their health. So health related industries such as pharmaceuticals, medical materials and nutrition will have the same tendency. Every company that is related to China’s environmental or national policy would have the drive to engage in overseas M&A to gain the technology and operational management that the country lacks.

The second is related to the global migration of some industries. Unlike those in the first trend, such industries may not be the newest or most pursued sectors. However, from an Asian perspective, there is a very valid reason for engaging in M&A. For example, industries like textile, printing and dyeing and automobile may not be the most pursued ones in the West. But they still have promising applications in the Asian markets. These industries will also be an area of focus for Asian companies engaging in overseas M&A.

The Impact of Shale Gas Revolution

Moringwhistle: What is the impact of American shale gas revolution on the chemical industry?

PENG Yuan: The impact of this shale gas revolution is the most direct and significant. It is in the upstream market of the chemical industry and the direct source for many chemical and materials.

From the point of view of M&A, the shale gas revolution may lead to a restructuring of the whole chemical industry. Every company may need a repositioning as to which businesses they would want to focus against a changed global gas supply.

In fact, we have noticed some American chemical companies that benefited from the lower cost of shale gas are now performing very well.

Moringwhistle: How will the shale gas revolution affect the M&A trending of American chemical industry?

PENG Yuan: First, I think it may result in American chemical manufacturers returning to the global stage. On the aspect of chemical manufacture, the lower cost of using shale gas as well as lower electricity and related costs will increase the competitiveness of the American manufacturers in the global market.

Second, the upper and lower ends of the chemical supply chain may consider an integration among themselves. Due to the cheaper raw materials brought on by shale gas, some North American products such as PVC that were not particularly competitive in the past, are beginning to gain new advantages. As a result, the American companies that are not directly involved in shale gas but manufacture products such as PVC would benefit from the ultimately lower cost of shale gas and thus will also gain a competitive edge.

Because shale gas based raw materials can be used for many chemical products, many American chemical companies stand to benefit from this shale gas revolution. For the entire chemical industry, companies whose main operation or production facilities are in America will surely think about these new cost advantages when considering their future development strategies.

Moringwhistle:To the non-American companies, what is the impact of this revolution on M&A?

PENG Yuan: In Asia, including China, Korea, Japan and India, many companies limited by the oil and gas resources want to enjoy the benefits and advantages created by the American shale gas revolution through investment or M&A. This desire may drive M&A activities throughout the chemical industry, which may not necessarily be in the form of acquiring plots containing shale gas deposits for exploration and development, such as the likes of PetroChina.

From a cross-border M&A perspective, Asian companies will have more impetus to acquire American companies. On top of the access to international markets, a global brand and technology, the cost advantage provides an additional impetus.

On the other hand, the American companies will reevaluate their strategies and realign their product positioning. By divesting some non-core businesses, they can enhance their financial power to purchase other businesses that will be more beneficial to themselves. Some companies may also choose to sell a non-core but somewhat gas related business now at a good price while everyone is talking about the shale gas subject.

Moreover,this revolution will create an indirect effect where companies in the Middle East will pay more attention to Asian market and M&A opportunities in the region. The ultimate goal of America is to become self-sufficient on its own energy resources. Though the US still imports lots of crude from the Middle East, it will be less and less dependent on imports. There are predictions that, after several years, America will become an energy self-sufficient country, which means the Middle East will lose a huge export market. Hence, companies of the Middle East will put more focus on the Asian market, increasing the Asian companies’ bargaining power.

Lastly, Europe will also participate in the changing dynamic of global M&A. However, in respect of the European financial difficulties these days, European companies may offer more acquisition opportunities to Chinese companies. European firms with a long established business and best-in-class technologies would be regarded as attractive acquisition targets.

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