Deloitte Global 2018 chemical industry mergers and acquisitions outlook

Chemical companies searching for growth results in strong appetite for M&A activity in 2018

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Feb 15, 2018, 09:31 ET

NEW YORK, Feb. 15, 2018 /PRNewswire/ -- Global chemical mergers and acquisitions (M&A) activity in 2018 is expected to remain strong, as higher valuations continue to be mitigated by improving global economic conditions, continued inexpensive financing, and an appetite amongst industry participants for growth and transformative M&A transactions, according to Deloitte Global's 2018 chemical industry mergers and acquisitions outlook.

A multitude of mega-deals which resulted in record levels of deal value in 2015 and 2016 were not seen in 2017 (46.4 US$ billions). Deal volumes on the other hand were just as strong in 2017 with 637 transactions. "There may be a slight decline in deal volume in 2018 as the dispositions from the mega-deals have subsided, but 2018 is expected to be another robust M&A year in the chemical industry," said Dan Schweller, Deloitte Global M&A leader for the Chemicals & Specialty Materials Sector. "Deal flow remains strong and there remains great interest in turning to M&A to further drive shareholder returns."

In the US, historic tax reform measures that have cut tax rates and increased cash repatriation from international locations may serve to support M&A activity. "US corporate taxpayers will likely benefit from having more cash available to invest in improving their shareholders' value—this could result in additional capital expenditures, increasing buybacks or dividends, or in pursuing M&A activity," said Dan Schweller.

During 2017, the number of US$1 billion deals maintained their volume (number of transactions) but notably failed to deliver the mega-deal values established in prior years, falling below the deal values achieved in both 2015 and 2016. It is not expected that 2018 will deliver such deal values either as many sectors have reached a point where regulatory constraints may challenge further consolidation at a large scale.

However, the rise in the M&A market of state-owned oil and gas enterprises moving downstream, rising feedstock prices, and pressure on margins is likely to propel scale and synergy-driven M&A plays as well as portfolio rebalancing amongst traditional commodity chemical players. Consolidation is also likely to continue in more fragmented sectors of specialty chemicals such as the adhesives and sealants sub-sectors. Meanwhile, strong M&A appetites of large players, competition regulator-mandated divestitures, and portfolio realignment resulting from past mega-deals drive M&A transactions.

Activist investors continue to make their presence known in the industry, making a significant impact on the chemical M&A market, both in terms of shaping deals as well as blocking deals from happening. They are expected to continue pressuring companies to focus on core competencies to achieve additional returns on top of historically high valuations, further fueling M&A activity in 2018.

"While global economic conditions continue to improve, thereby supporting strong valuations, growth rates remain challenged, incentivizing chemical companies to use M&A to support their growth strategies," said Wolfgang Falter, Deloitte Global Chemicals & Specialty Materials Sector leader. "Deloitte expects to see these global trends to strengthen increased deal activity in the chemicals industry."

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SOURCE Deloitte