Our Sunday Thematic research a week ago (see linked report) discussed slowing growth investment in the traditional commodity chemical industry and suggested that ESG and climate pressures might slow investment even further. Yesterday, our Sunday Thematic made the argument that some of those dollars will target strategic M&A. We have recently seen an uptick in global chemicals sector M&A, and we find few items suggesting activity levels will slow in the near-to-medium term. In part, we think strategic M&A will be easier to get Board approval for than “new build” capacity additions, and it can be viewed as better use than holding cash or complementary to dividends and buybacks. Also, ESG and climate concerns could spur M&A activity, as companies look to separate bad emission assets from good ones – especially if the market values them very differently.
Source: The Valence Group of Piper Sandler: Disclosed Transactions > $200m
An item not discussed yesterday was whether the heightened M&A activity, together with the very low-interest environment of the last few years, is causing companies to over-pay. According to the underlying data in the chart above, transaction multiples have increased, and while some of this may be a mix issue – more specialty relative to fewer commodity assets changing hands, it may also be indicative of the competition for assets rising, coupled with lower borrowing rates. We still believe that there will be one or two blockbuster deals in the sector over the next year or so and would not be surprised to see one or two large commodity chemical mergers.
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