Wall Street investment bank forecast: a large number of chemical assets will pour into the global merger and acquisition market

Wall Street investment bankers say a large number of chemical assets will enter the M&A market in the second half of 2023 as business conditions improve and funding markets stabilize, ICIS reported. "A lot of these chemical assets that want to go into the M&A market are in the hands of private equity firms," said Derek McNulty, managing director and head of chemical investments for North America at Citibank. More than 80 chemical companies have been owned by private equity firms for more than five years, which is usually the end of their holding period."

Mr McNulty said that while funding costs were not expected to fall significantly in the second half, markets were likely to be more active and more receptive to higher levels of leverage. The M&A market is still in the price discovery phase. At this stage, sellers must become more comfortable with lower valuation multiples, while buyers need to spend more expensive financing costs. "The challenge in the global M&A market today is the cost of capital," McNulty said. Over the past year, the Fed funds rate has risen by 400 basis points, and the impact on discounted cash flow valuations is clear. The higher cost of capital will have a greater impact on highly valued assets."

Cameron Morris, managing director of chemicals for North America at jpmorgan, also said: "There is some pent-up demand for direct lending. As traditional financing from banks largely dried up in the second half of 2022 due to soaring interest rates and recession fears, non-bank direct lenders stepped in to fill some of the void."

Market participants also believe that while bid-ask spreads for M&A deals are expected to narrow in the second half, they will not be enough to completely clear the backlog of orders. "Historically, when there's a disconnect between buying and selling, something creative tends to bridge that gap," said Brian Orkin, an investment partner at private equity firm Arsenal Capital. Examples include the seller being able to participate in the future earnings of the asset, and seller financing, etc. This is increasingly happening in large trades."

Mr Moelis believes that for companies looking to sell businesses this year, starting the process early could take the initiative. "We expect a high volume of deals in the second half of the year, so it is important to start chemical asset sales as early as possible and have informal discussions," he said. Things will be more difficult later this year. We expect that companies will increasingly look to sell non-core assets to simplify their businesses and relieve valuation pressure on diversified or large conglomerates, as equity markets continue to discount these companies. We expect more strategic divestitures this year and next."

As for the buy-side, Mr McNulty said that while private equity firms would be more affected by the rising cost of capital, corporate buyers were more affected by share prices, becoming more cautious when prices were depressed. "That's the main reason why M&A activity is down - it's very much in line with the S&P 500," he noted.

Mr Orkin said the macroeconomic headwinds created uncertainty that was not conducive to larger deals and could have a significant chilling effect. But history shows that some of the best deals have been done in chaotic times. He predicted that while tough conditions in the M&A market would continue in the short term, many would be pinning their hopes on a sharp recovery later this year.