Increased M&A activity

As global chemical firms divest their non-core assets, Middle Eastern producers could be perfectly placed to acquire the expertise of niche, specialty chemical firms

Activist investors will play a key role in M&A activity in 2015, according to a report by A.T. Kearney.
Activist investors will play a key role in M&A activity in 2015, according to a report by A.T. Kearney.

As global chemical firms divest their non-core assets, Middle Eastern producers could be perfectly placed to acquire the expertise of niche, specialty chemical firms

Mergers and acquisitions (M&A) activity in the global chemical industry increased significantly in 2014, according to a report issued by AT Kearney. The report’s findings on the global chemical industry could have wider ramifications for the Middle East’s downstream players, as they look to move into the specialty chemicals arena.

The report showed a steady increase in both the number of global mega deals being conducted and the average deal value, for a third consecutive year.

The number of mega deals, worth in excess of $1bn, rose to 23 in 2014, from 18 in 2013. Similarly, the mean value of deals rose to $15mn by the end of 2014, compared to $13bn in 2013.

The total value of M&A
activity in the global chemical industry reached $82bn in 2014, a 67% jump from 2012’s figure of $47bn. However, the figure is still well below the 10-year average of $92bn.

This flurry of M&A activity is being driven in part by activist investors, applying pressure on international firms to divest their non-core assets in an attempt to sharpen their focus on profitability.

As oil prices continue to fluctuate wildly, international downstream oil and gas firms are looking to refocus their portfolios on their key competencies.

“In terms of the nature of deals we are seeing, and I think this gives us a clue as to the type of activity we are going to be seeing in the future as well, we are seeing businesses doing a lot of cleaning up of their portfolios. That has been as a combination of companies focusing down on their key competencies and divesting businesses which no longer fit their particular area of focus,” said Richard Forrest, global lead partner for the Energy Practice at A.T. Kearney.

“There is a balance between cleaning up the portfolio and looking at downstream investment. When we sat back and asked ourselves why that is, actually there are a number of reasons,” he added.

Chief amongst those reasons is the role of the activist investor. Activist investors typically invest around 5% in a company. Rather than being a private equity deal, where the investor takes ownership of the business, activist investors take only enough of a share in the business to give them a voice and express an opinion at the executive board level. By doing so, they are able to have a significant influence on a company’s strategic decision making.

“If you look at the sort of things that these activist investors are putting pressure on, it’s usually along the same lines as those which are highlighted in our report, namely cleaning up the portfolios. Essentially, diversified chemical companies have a very great opportunity to clean up their portfolios by selling assets that they are no longer the best owner of, and reinvesting in a portfolio that drives a better value over all. If you look at the survey itself, over 50% of respondents expected the activist investors to play a key role in M&A activity in 2015,” he said.

As activist investors assert more and more pressure on their companies to divest non-core assets, a raft of niche companies around the world are being sold off, including BASF’s global textile business, AkzoNobel’s paper chemicals business and DSM’s composite resin business. This could present a real opportunity for Middle Eastern downstream producers to precipitate their expansion into the arena of specialty chemicals by acquiring
niche firms.

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This would allow GCC firms to gain access to valuable expertise, innovative technologies as well as obtaining entry points in to new and developing markets.

“We believe that this does provide an opportunity for Middle Eastern players to seriously consider some of these assets and to see if they fit within their future diversification plays. It is something that they should seriously consider because these Middle Eastern players really want to diversify and get into the
specialty chemicals market,” said Ojas Wadivkar, partner at A.T. Kearney Middle East.

This has been a successfully trodden path for petrochemical and refinery operators in the Middle East in recent years, and analysts expect to see more of this type of activity in 2015 and beyond.

“A good example of this was last year when there was a public announcement that Oman Oil acquired Oxo chemicals in late 2013/early 2014, purely because they wanted access to the Oxo Chemicals portfolio. For Oman, this was a diversification play, and this would be true for most of the other GCC countries too. To summarise, we see this as a real opportunity for the Middle Eastern players,” said Wadivkar.

A decision to acquire foreign owned assets would be a departure from the recent trend in the GCC’s chemical industry, which has seen the majority of producers focusing on the addition of domestic capacity rather than broadening their focus to incorporate specialty chemicals.

The strategy of pushing further down the value chain has long been touted as an ideal way for the GCC to sharpen its competitive edge in the downstream sector. The region’s current production methods are geared towards large scale production of commodity petrochemicals for export to various locations around the world.

In order to maximise profitability, the region will need to produce a broader slate of specialty chemicals which can be consumed by the domestic market. Achieving this will be no mean feat, and GCC producers are in the process of doing this through a series of innovative Joint Ventures (most notably Sadara). However, the acquisition of international niche firms could be one way for the region’s key players to accelerate this process.

“Specialty chemicals are definitely important. One of the things that you will see is that the chemicals will be produced more and more using liquid crackers. Traditionally we have had ethane based crackers in the Middle East but that is starting to change. Liquid crackers will enable producers to produce a broader range of specialty products,” said Wadivkar.

“There are definitely opportunities for Middle Eastern players to invest internationally and gain some of that expertise and positions in their downstream businesses,” added Forrest

Factbox:
- 23 The number of M&A mega deals, worth in excess of $1bn in 2014.
- $15mn The average value of global M&A deals.

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