Private equity investors are increasingly eyeing the chemical sector as a period of retrenchment in the post-2008 downturn has given way to a more bullish sentiment.
With large chemical companies seeking to streamline, divestitures are likely to provide investment opportunities to private equity investors.
But there are other reasons why the chemical sector remains attractive to experienced private equity investors. The industry has learnt the lessons from past investment cycles and become more disciplined, while the viability of feedstock sources such as shale gas also provides a competitive outlook for petrochemicals.
"There are two key reasons why private equity is favorable to chemical investments," said Neil Burns of specialist chemical sector advisory company Neil A Burns. "One is that there is a sense that the industry has been more disciplined about capacity installations and therefore utilization is running higher and there is less of a risk of a downturn following an investment binge, as happened in the past."
"Secondly, the well-documented emergence of shale gas as a source of ethane has enabled a long term competitive future for petrochemicals manufacturing that was not on the radar screen just a few years ago," he said.
Similarly, the cyclicality of the sector has done little in the way of deterring investors who have historically invested in it.
ACQUISITIONS
Private equity company Bridgepoint this month acquired Finland's Kemfine from UK-based private equity company 3i for Eur140 million ($200 million), the first add-on acquisition for their portfolio company.
German chemical manufacturer CABB was in turn acquired from French private equity house AXA Private Equity in March in a deal thought to be over the Eur340 million mark.
"The sector does not have a good reputation with private equity because of its cyclicality, environmental concerns and complexity of products and value chain," said Thibault Basquin, director at AXA Private Equity in a recent interview with Platts. "The cyclicality of the business, and therefore the timing for a new investment, is something private equity investors consider very carefully."
Despite that, AXA PE have not held back from investing and others also see chances for experienced investors.
Ronald Ayles, partner at Boston-based private equity company Advent International in Frankfurt and head of the company's chemical practice said: "The chemical sector is often less competitive as fewer private equity investors have the relevant expertise and thus shy away from making investments in this space."
"In addition, many of the assets for sale need significant hands-on work as these are often carve-outs with limited or no stand-alone infrastructure," he said.
Historically, private equity companies have not represented the bulk of investments in the chemical sector.
"The number of shares of petchems related M&A deals over the last 10 years has not been significant to be able to say that there has been an overall change in attitude since [the] onset of the crisis," said Paul Bjacek, lead analyst at consultancy company Accenture.
COMMODITY VS SPECIALTY
But while exposure to cyclical downturns and the capital intensive nature of the sector could dissuade some, experienced private investors see it as an opportunity.
When it comes to "optionalities," the market is divided some sources see a tendency to "shy away" from commodity-based assets said to be more exposed to supply/demand dynamics and prefer specialty businesses.
"One of our portfolio companies, German polyvinyl chloride producer Vinnolit for example we have been helping turn its focus to specialty PVC applications and away from pure commodity PVC," Ayles said. "Optionalities of the business model and the value chain play an important role in managing this cyclical risk, they also provide more options for expansion making them very important to chemical investments."
"We do have a lot of experience with this. Oxea is a case in point, a complex carve-out of assets from two industrial conglomerates, Celanese and Evonik, which we have merged and evolved into one of the top producers of Oxo intermediates and derivatives," he said.
"The company has invested significantly to build its higher margin derivatives portfolio, which helped improve margins markedly and allowed Oxea to weather the downturn more successfully than most intermediate chemical companies," said Ayles.
However, some investors believe commodity-based assets are equally interesting and believe that cyclical risk can be managed by opting to diversify the feedstock base among other things.
The German CABB and French Eliokem sales and France's Novacap acquisition were auctions that saw both strategic and private investors bid for the companies. It would appear that current increases in feedstock costs and energy market volatility has done little to deter experienced investors from a sector that is otherwise very cyclical.
"I don't like the difference drawn between commodity and specialty, there are very good commodity-based companies. All depends on the supply/capacity environment as well as market dynamics," said Basquin. "Raw materials/energy costs can be addressed by diversification from one type of energy to several.
"Novacap, for example, is not only working from coal, but it also gas, and will go into biomass in the future, allowing valuing the product based on these variables," he said.
LOOKING AHEAD
Going forward, industry sources have said that the sector is likely to see a lot of M&A divestitures as strategics seek to streamline their businesses.
"The chemical sector is a fertile hunting ground...during recession there was a bit of a pullback [but]...now it has gone back to pre-downturn levels, 20-30% of M&A deals done," said Mark Adams, private equity partner at Deloitte.
As for challenges, these are tied to the need to set up acquired platforms and/or integrate them into existing ones as well as increasingly globalized product distribution network.
"Challenges are likely to arise from the need to set up the operating structure for these carve outs, and then quickly and successfully integrate add-on acquisitions to the rest of the business. Competition from higher growth BRIC countries and delivery of products to end user markets is also elements growing in relevance when it comes to investments in the chemical sector," said Ayles.
