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Chemicals M&A Market Poised for a Rebound in 2021?

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Mergers and acquisitions activity in the U.S. chemical industry slowed in 2020 versus 2019, both in terms of the number of deals and value. Many industry observers are predicting that the chemicals M&A market is poised for a major rebound in 2021 following a pandemic-hindered 2020 as business confidence returns and central banks keep financing markets buoyant. Positive news on the vaccine front, continuing central bank policies boosting liquidity and a new US Administration that could ease global trade tensions are all giving encouragement to the M&A market. It seems that transaction multiples have held up well during the pandemic while public valuations for chemicals companies have seen robust recoveries in anticipation of a global economic recovery post-coronavirus.

The American Chemistry Council (ACC), a Washington, DC-based chemical industry trade group, believes that the American chemical industry has pulled off a comeback from coronavirus-induced challenges and is poised for an upswing in 2021, according to its newly released “Year-End 2020 Chemical Industry Situation and Outlook.” According to Deloitte, U.S. chemical industry revenues and operating income are expected to grow about 8% and 17% in 2021, respectively, following an estimated 9% and 14% decline in 2020, respectively.

In 2020, the U.S. chemical industry reeled under the effects of global manufacturing slowdown, protectionist trade policies and uncertainties surrounding the U.S. elections. Chemical production slipped as the pandemic hurt businesses, the ACC noted. However, the industry benefited from higher demand for inputs that are used to make products (including personal protective equipment, plastic packaging, disinfection and sanitation products) used in the global fight against the pandemic. The ACC said that the recovery in the U.S. chemical industry that started in the third quarter on the back of an improvement in major end-use markets continues to take hold and the outlook for the next year is positive backed by solid fundamentals. U.S. chemical production has gained momentum after being hit by weaker demand, supply disruptions and falling revenues resulting from the pandemic.

In 2020, there were a number of M&A deals announced, including Ardian’s acquisition of a 50% stake in US-based specialty additives and intermediates producer ANGUS Chemical from Golden Gate Capital at a total enterprise value of $2.25 billion, and PPG’s $1.15 billion acquisition Ennis-Flint, a global manufacturer of coatings with a broad portfolio of pavement marking products, including paint, thermoplastics and other advanced traffic technologies. In December 2020, Huntsman Corporation announced its $250 million planned acquisition of Gabriel Performance Products, a producer of specialty additives and epoxy curing agents for the coatings, adhesives, sealants and composite end-markets, from Audax Private Equity, which deal closed in January 2021. According to Huntsman, based on calendar year 2019, the purchase price represents an adjusted EBITDA multiple of approximately 11 times, or approximately 8 times pro forma for synergies.

In addition, there are a number of deals that are rumored to be on the horizon. According to a recent Bloomberg report, private equity firm Bain Capital is seeking a sale of cleaning chemicals company Diversey for around $6 billion ( Bain declined to comment on the report), and according to another recent Bloomberg report, BASF SE is weighing the sale of certain of its U.S. chemical businesses.

In December 2019, DuPont and International Flavors & Fragrances announced that they entered into a definitive agreement for the merger of International Flavors & Fragrances and DuPont’s nutrition & biosciences business in a Reverse Morris Trust transaction, a transaction under U.S. law that allows a tax-free transfer of a subsidiary if certain legal requirements are met. The deal values the combined company at $45.4 billion on an enterprise value basis, reflecting a value of $26.2 billion for the nutrition & biosciences business based on International Flavors & Fragrances’ closing share price prior to the announcement of the transaction. Under the terms of the agreement, DuPont shareholders will own 55.4% of the shares of the new company and existing International Flavors & Fragrances shareholders will own 44.6%. Upon completion of the transaction, DuPont will receive a one-time $7.3 billion special cash payment, subject to certain adjustments. The transaction closed on February 1, 2021.

In October 2020, LyondellBasell and Sasol announced they entered into a definitive agreement to form a 50/50 joint venture (JV) through which LyondellBasell will acquire 50 percent of Sasol’s 1.5 MM ton ethane cracker, 0.9 MM ton low and linear-low density polyethylene plants and associated infrastructure in Lake Charles, LA for a total consideration of $2 billion. The JV will operate under the name Louisiana Integrated PolyEthylene JV LLC.

Under the terms of the transaction agreements, each JV partner will provide pro-rata shares of ethane feedstocks and will offtake pro-rata shares of cracker and polyethylene products at cost. LyondellBasell will operate the U.S. Base Chemicals assets on behalf of the JV. Sasol will retain full ownership and operational control of its Lake Charles Research and Development complex, Lake Charles East Plant ethane cracker and U.S. Performance Chemicals Business assets in Lake Charles. Sasol will also retain access to competitively priced onsite ethylene to ensure value chain integration.

In a deal announced in June 2020 and that closed on January 1, 2021, bp sold its global petrochemicals business to INEOS for a total consideration of $5 billion. bp’s petrochemicals business is focused on two main businesses – aromatics and acetyls – each of which has leading technology and advantaged manufacturing plants, including a strong presence in growth markets in Asia. In total, the businesses have interests in 14 manufacturing plants in Asia, Europe and the US (Cooper River, SC (purified terephthalic acid (PTA)); Texas City, TX (paraxylene (PX) and metaxylene); Eastman bp Texas City Production Agreement (acetic acid)) and in 2019 produced 9.7 million tons of petrochemicals.

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