According to a new report from PricewaterhouseCoopers, the chemicals industry will continue to see consolidation, the result of competition from new producers in developing countries and resource rich regions, rising oil prices and greater regulation.The total value of transactions traded or announced so far this year is about $58 billion, exceeding the $56 billion of 2005, PwC said.
The report notes the trend of “mega deals,” saying that last year, 15 deals worth $1 billion or more were 62 percent of the total value transacted. Nine mega deals have been completed or announced in the first 6 months of 2006.
While companies in North America and Western Europe account for 87 percent of the value traded via large deals, the number of transactions in Asia Pacific surpassed those of the rest of the world for the first time, with China accounting for almost half of this activity.
“Interest in the chemicals sector remains unabated, and with the desire to consolidate and secure greater scale, there are many opportunities,” said Saverio Fato, global chemicals leader for PricewaterhouseCoopers. “The trend towards mega deals is becoming more pronounced, which is building up the phenomenal pace of volume and value deals.”
Many chemical companies are moving into new business areas and disposing of non-core activities. M&A is used to improve market position in North America and Europe, but there is a preference to expand in Asia by investing in plants.
Financial investors, primarily those in the U.S. and Western Europe, play a major role in several of the deals in the chemicals industry. They have been a catalyst for the consolidation of the sector by investing when there were fewer strategic buyers with the interest or the finance to do so, and the value of chemical assets that have been sold by private equity is beginning to exceed the value of those acquired.
New initiatives like the European Union’s draft law on Registration, Evaluation and Authorization of Chemicals (REACH) will play a larger role in deal activity and is likely to change the economics of certain chemicals or chemical families when it comes to compliance costs. Some chemicals may be withdrawn or replaced by substitute products.
The European Union Emissions Trading Scheme and the need to add the cost of carbon abatement will make the process for valuing carbon exposed assets in the sector harder, particularly when disparities between and uncertainties about different regulatory frameworks are factored in. This makes the cost of carbon a key consideration and factor for strategic decisions and deals.
In regional markets, North American companies had 84 large deals worth $54 billion, or 41 percent of the total value that was traded. There were 13 mega deals and average deal values in North America and Western Europe were significantly higher than the rest of the world.
Western Europe had 94 transactions worth $50 million or more between 2003 and 2005, which had an aggregate value of $60 billion, or 46 percent of the total value traded during that period. German companies had 27 large deals, the UK had 12 and there were 10 French deals, which had a combined value of $2.3 billion.
Asia-Pacific had only 33 large deals worth a combined $11.9 billion, or 9 percent of the value traded. Japan had only 3 deals, due to its preference for cross-shareholdings instead of takeovers. India, China and South Korea had 3 large deals and Thailand had 2.
For more information, go to http://www.pwc.com/chemicals