Chemical industry M&A expected to face challenges, but remain robust amid global uncertainty: Deloitte Global report
New York, Moscow, - 5 March 2019 - Global chemical mergers and acquisitions (M&A) activity in 2019 is expected to pull back slightly from 2018 levels against a backdrop of uncertainty—rising interest rates, trade tensions, and slowing economic growth. Despite a potential decrease in M&A deal volume, Deloitte Global’s 2019 chemical industry mergers and acquisitions outlook predicts that there will still be a robust market for M&A in the industry.
Global M&A volume reached 600 deals in 2018, a decline of 5 percent compared to 2017, but total M&A value was still higher than in each of the years from 2010 to 2013. After a slow first quarter, deal volume increased in each successive quarter in 2018, and deal values were also strong, with billion dollar-deals increasing in both quantity and value.
“In 2019, we expect a modest decline in chemical industry M&A activity, but as demonstrated in the past, activity should still be strong despite global uncertainty,” says Dan Schweller, Deloitte Global M&A leader for the Chemicals & Specialty Materials Sector. “Underlying conditions for a strong M&A market remain intact—ample cash on-hand for buyers, availability of relatively cheap credit, and the desire to increase ROI for investors.”
For M&A activity in the chemical industry to continue to be strong, there will be headwinds for organizations to navigate in the coming year. The IMF recently cut its global economic growth rate expectation to 3.5 percent in 2019; growth in industrial production is also under pressure in many economies. Additionally, trade conflicts threaten to increase uncertainty and lessen the attractiveness of cross-border M&A deals. Chemical industry companies will be closely following trade negotiations between the United States and China, as well as ongoing Brexit developments.
“Protectionism and trade concerns are weighing heavily on companies and global regulators continue to heavily scrutinize deals. As a result, we may see hesitancy towards cross-border M&A deals,” continues Schweller. “However, the equity market declined in the fourth quarter, which may make high deal valuations—a limiting factor for M&A in 2018—more palatable to investors moving forward.”
There is also an ongoing discussion in the industry about the “circular economy” to reduce plastic waste. Significant actions are being taken in an effort to create programs and solutions that can be applied globally to eliminate harmful pollutants, especially in areas with “high plastic leakage.” These efforts will likely result in new innovation and startups and could drive additional M&A activity.
Activist investors continue to be a force in the industry, making a significant impact on the chemical M&A market in terms of shaping deals and impacting companies’ strategic direction. Shareholder activists are expected to continue pressuring companies, and in some cases, their investments may signal more divestitures in 2019.
“An important trend to observe in the coming year is the impact of the digital and circular economy on chemical industry M&A,” says Wolfgang Falter, Deloitte Global Chemicals & Specialty Materials Sector leader. “Highly diversified companies are already leveraging digital technologies across many functions. M&A will continue to be a tool for companies to stay ahead of competitors and drive transformation.”
“The year 2018 has seen relatively few M&A deals in the Russian chemical industry compared to other industries with most of the deals taking place on the domestic market,” stated Yulia Orlova, Chemical Industry Group Leader. “Such a small percentage of transactions with foreign partners is a result of several negative economic factors: increased US and EU sanctions, the Russian ruble’s devaluation, the Russian embargo, and the deterioration of relations with European and American partners. At the same time, the Russian chemical market consists mainly of private companies that are planning to strengthen their M&A investment activity in order to accelerate the economic transition from a commodity export model to an innovative investment model. Owners of chemical companies seek to commoditise their products, enter new markets, and develop new offerings. Thus, M&A deals persistently aim at separating and consolidating core businesses and disposing of non-core assets. Since attracting investments from the US and EU is significantly limited by sanctions, we should expect growth in transactions with investors from Asia and the Middle East,” added Yulia Orlova, “In the medium and long term, we do not expect such large-scale M&A deals as we have seen in recent years (for example, on the mineral fertilizer market). The Russian market will refocus its investment activities to strengthen R&D, design new high-tech materials, implement digital technologies, and develop a cyclical economy.”
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