Global Chemical Mergers and Acquisitions are Expected to Continue

In 2021, despite inflation, supply disruptions and geopolitical risks, this did not have a significant negative impact on the chemical M&A market that year. In 2022, the geopolitical situation in Europe has brought huge economic uncertainty, and many market participants have difficulty predicting the prospects of enterprises. However, some market participants believe that because the demand outlook is still optimistic, they are still optimistic about the prospects of the global chemical M&A market this year, but the environment will be more complicated.

M&A fever is expected to continue

Market participants said that although inflation, tight supply and the conflict between Russia and Ukraine have added considerable uncertainty to the economic outlook, demand for chemicals remains high. Many chemical companies focus on meeting demand. This will give chemical companies an incentive to participate in M&A transactions.

Sean Murray, managing director of Goldman Sachs, said that the chemical M&A market in 2022 is optimistic and will continue to be hot if compared to the data at the beginning of the new crown pneumonia outbreak. In the second half of 2020, as the global economy rebounded strongly, 138 chemical mergers and acquisitions were announced with a total value of US$45 billion, according to data from Chemical Weekly. Approximately 315 chemical M&A transactions were announced in 2021, totaling approximately $116.4 billion. At present, the market demand is still strong, and the hot momentum of the chemical M&A market is expected to continue.

Murray said that although the market is volatile in 2021, it will also bring huge profits to the chemical industry, and the valuation of mergers and acquisitions will also follow the global stock market to hit a new high. M&A profit multiples in specialty chemicals industries such as personal care, flavors and fragrances, pharmaceuticals, and life sciences often exceed 15 times, and some even exceed 20 times. Even M&A profit multiples for general chemicals and intermediate goods assets are in the double digits, higher than historical levels. Murray said last year was the most active and highest-value year for global chemical M&A activity since 2015-2016. With the background of the market still in the expansion period, the chemical M&A market in 2022 is still optimistic.

increased economic uncertainty

It is undeniable that the current European geopolitical situation and macroeconomic situation will indeed cool down the M&A market. However, Murray believes that economic uncertainty is unlikely to cause a major shift in the macroeconomic situation, and even if the market cools down, it is difficult to change the fiery expectations.

But the situation in Europe is more serious. The Russian-Ukrainian conflict and its economic fallout are causing most European dealmakers to hit the pause button, as bankers and executives try to assess asset risk amid soaring energy costs on the continent. The war had less direct impact on North America, but it exacerbated supply constraints and inflation for raw materials, energy, and labor. Anthony George, managing director of chemicals and materials at investment bank TM Capital, said: "The conflict has exacerbated an already difficult situation, with labor, inflation, and raw material costs rising rapidly, creating a systemic rise in costs." Murray also Acknowledging: "The biggest barrier to M&A activity is uncertainty because we're in a very uncertain time."

The European market is cooling down

While M&A support conditions such as credit availability and cash reserves for private equity firms remain in place due to heightened economic uncertainty, M&A forecasting scenarios may be more difficult given cost inflation and higher geopolitical risks.

The impact of the Russian-Ukrainian conflict, further disruptions to supply chains and continued rising energy prices have lowered demand growth expectations. S&P Global Market Intelligence lowered its 2022 global GDP forecast to 3.3%, compared with 4.1% in February. Sarah Johnson, executive director of S&P Global Market Intelligence, said: “The Russian-Ukrainian conflict has a direct impact on global commodities and will further disrupt global supply chains, drive up prices and slow economic growth, especially in Europe. The Russian economy will suffer from sanctions. , the exodus of foreign companies and a renewed emphasis on energy security suffered permanent damage.” But she also said the world economy was resilient enough to avoid recession.

The Russian-Ukrainian conflict has had the greatest impact on the European chemical industry. Murray said: “For some of the more downstream companies, despite rising raw material prices and freight rates, they still have the ability to pass costs on to downstream companies and will not have much impact on corporate mergers and acquisitions. In contrast. , the upstream chemical industry in Europe will face huge difficulties.” Jared Mucci, general manager of the chemical business of investment bank Piper Sandler, said: “If the impact of European energy prices reaches a critical value, mergers and acquisitions will be suspended.” Some chemical assets Owners are also assessing the impact. “We are spending a lot of time understanding the impact of the conflict and the impact on different parts of our business, such as supply chain, logistics and energy costs,” said Roy Cerosi, investment partner at Arsenal Capital.

Interest rates have also attracted the attention of practitioners. The Federal Reserve raised its benchmark interest rate by 0.25% in March in an effort to curb inflation, possibly the first in a series of rate hikes. So far, though, interest rates have had little effect on mergers and leveraged loans.