Chemicals M&A activity remains sluggish but rebound signs are there: Kearney

Chemicals M&A activity remains sluggish but rebound signs are there: Kearney

Continued repression and hot spots define recent chemical industry trends

  • By ICN Bureau | June 11, 2024

The rate of mergers and acquisitions in the chemical sector has carved an uneven landscape in recent years. Despite chemical executives’ persistent optimism for deal rebounds after repeated falloffs, macroeconomics and other factors have proved unfavorable and challenging, 

According to Kearney’s latest Chemicals Executive M&A report, global chemicals M&A saw deal value fall 4 percent in 2023 from 2022 levels. While it was a small drop for the year, deal value has been on a generally steep decline since 2019, plunging 59 per cent. New deals announced in 2021, along with some economic recovery, fueled a deal increase that year, but the sector lost steam again when unforeseen factors, including elevated interest rates, recession fears, and geopolitical conflicts, turned deal-makers cautious again in 2022 and 2023. Increased operational costs, the impact of the conflict in Ukraine on global supply chains, and prolonged COVID lockdowns in China further affected the industry and dampened M&A activity.

“Pressure is mounting for the chemicals M&A market to open up,” said Andrew Walberer, Kearney partner and co-author of the 2024 Chemicals Executive M&A Report. “We expect small to mid-size deals to predominate in the near future, rather than the mega deals we’ve seen in the past. Europe will remain a challenging place for outsiders to make M&A deals right now, with the Ukraine-driven decline in foreign investments there. Across the board, deals will continue to be expensive, since multiples continue to be relatively high.”

Looking at chemical-sector investors themselves, strategic acquirors stuck to safer paths in 2023. Among the top 15 deals by value last year, consolidation, scale, and vertical integration (partially for supply chain resilience) were the primary rationale for 53 percent of transactions. In contrast, financial investors got more aggressive, with 26 percent of major M&A deals last year, compared to 7 percent in 2022.

2024 takes shape, with some optimistic signals

More than 50 percent of chemical executives we surveyed expect an increase in M&A activity in the next 12 to 18 months (see figure 2). Among the reasons they give are growing sustainability-related pressure from government policies and shareholders; plans for expansion of new products to meet demand for sustainable, carbon footprint-reducing options; and a shift from traditional commodity business to more innovative, customer-facing models in areas such as recycling, renewables, and specialty.

Leaders also expect divestment of non-core assets to accelerate (driven by portfolio streamlining and decarbonization) and a focus on nearshoring to ensure security of their supply.

Given this groundwork, the future trajectory of chemical M&A may be largely defined by several factors. First, there are the ongoing macroeconomic trends. High interest rates will likely continue to affect deals and chemical companies are at historically low valuations. In addition, private equity (PE) investors have a lot of dry powder—cash and cash-like reserves—to invest and could see this as an opportunity to make big moves in the near future.

The conflict in Ukraine will continue to influence deals in the medium term, temporarily reducing Europe’s attractiveness as an investment option. However, the prospect of major chemical players restructuring to deal with high structural cost and soft demand is expected to ignite M&A activity in the region.

And while executives were not as focused on decarbonization-related M&A in recent years, they still believe that persistent pressure from governments and shareholders, along with demand for sustainable products, will make environmental, social, and governance (ESG) compliance a priority. Further, bolder moves, such as ESG-focused acquisitions, partnerships, and capital investments in green projects and technology could be in the cards.

What’s next?

Pressure is mounting for the chemicals M&A market to open up. Strategics are one area feeling a growing need to restructure portfolios to increase profitability. European players will pick up the pace of divestments to deal with structural cost issues. And as an anticipated end to inflation and falling interest rates improve the macroeconomic environment, PE firms will find more opportunities to deploy the large pile of dry powder.

Based on these drivers, we expect small to mid-size deals to predominate in the near future, rather than the mega deals seen in the past. Still, M&As will remain expensive since multiples continue to be relatively high. And any EBITDA multiple inflation (one of the key determinants of a financial deal’s success) could stay subdued compared to the previous decade.

What this all means for chemical executives is this: M&A or divestiture will no longer be a stand-alone answer. The assets bought now will likely require more turnaround than in the past to meet the financial and strategic objectives of the deal. The RemainCo perimeter left after divestments will also require turnaround to mitigate the impact of dis-synergies and to ensure an improvement in competitive positioning and profitability. Hence, a focus on value creation becomes more important than ever, whether you’re a strategic or financial acquiror or a divestor.

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