Chemicals Sector Set for Further Consolidation, PricewaterhouseCoopers LLP Report Finds

NEW YORK, Aug. 29 /PRNewswire/ -- The chemicals industry has witnessed massive structural changes recently, but is set to experience even further consolidation, according to 'Chemical Compounds,' a new report from PricewaterhouseCoopers.

Mounting competition from new producers in developing countries and resource rich regions, rising oil prices and greater regulation have provided huge challenges to traditional industry players, so they are looking to consolidate further and secure greater scale. The total value of transactions traded or announced in 2006 has already reached nearly $58 billion, indicating that 2006 is set to surpass last year's total of $56 billion.

One of the most notable trends has been the rise of the mega deal. In 2005, there were 15 deals worth $1 billion or more, collectively accounting for 62 percent of the total value transacted. In the first six months of 2006 alone, nine mega deals have already been completed or announced. The value of these deals is spiralling upwards with year on year doubling of previous transactions.

Companies based in North America and Western Europe account for 87 percent of the value traded via large deals. However, when deals of all sizes are included the total number of transactions in Asia Pacific surpassed those of the rest of the world for the first time. China accounted for nearly half of this activity.

"Interest in the chemicals sector remains unabated, and with the desire to consolidate and secure greater scale, there are many opportunities," said Saverio Fato, global chemicals leader for PricewaterhouseCoopers. "The trend towards mega deals is becoming more pronounced, which is building up the phenomenal pace of volume and value of deals."

Many chemicals companies are pursuing portfolio management via the deal making process. They are moving into new business areas and disposing of non-core activities. Generally, M&As are used to improve market position in North America and Europe, but there is a preference to expand in Asia by investing in plant.

Financial investors, particularly those based in the US and Western Europe, are playing a major role in many of the deals in the chemicals industry. To an extent, they have helped speed up the consolidation of the sector by investing when there were fewer strategic buyers with the interest or the finance to do so. Typically, they adopt very different approaches to strategic buyers and also often have their exit strategies planned before they have even completed the purchase. The value of chemical assets that private equity has sold is starting to exceed the value of assets acquired.

The introduction of new initiatives such as REACH (the European Union's draft law on the Registration, Evaluation and Authorization of Chemicals) is inevitably going to play a greater role in deal activity going forward. It is likely to change the economics of certain chemicals, or families of chemicals, both in terms of one-off as well as ongoing compliance costs. Some chemicals could be withdrawn from the market or succumb to substitute products, which will drive re-thinking of operational profitability and consequently deal economics.

The development of the European Union Emissions Trading Scheme will have a similar effect. The need to incorporate the cost of carbon abatement is making the process for valuing carbon exposed assets in the chemicals sector more difficult. Disparities between and uncertainties about different regulatory frameworks are increasing this complexity. The cost of carbon is therefore now also a key consideration that must be incorporated in all strategic decisions and deals.

  Key regional markets:

  North America

Companies based in North America accounted for 84 large deals collectively worth $54 billion, 41 percent of the total value that changed hands. The bulk of the transactions occurred in the U.S. and 13 were mega deals worth at least $1 billion. Average deal values in both North America and Western Europe were significantly higher than the rest of the world.

Europe

Western Europe, along with North America, dominates the deal making scene in the chemicals sector. There were 94 transactions worth $50 million or more in Western Europe between 2003 and 2005, with an aggregate value of $60 billion -- 46 percent of the total value traded over the period. German companies alone accounted for 27 large deals. There were 12 deals involving UK based targets and 10 involving French targets. Companies based in Eastern Europe accounted for only 12 large deals collectively worth $2.3 billion.

Asia-Pacific

The Asia-Pacific region accounted for just 33 large deals collectively worth $11.9 billion, 9 percent of the total value that was traded. Japan proved particularly quiet, with only three such transactions; a fact that reflects its business culture and preference for cross-shareholdings rather than takeovers. India, China and South Korea each saw another three large deals, while Thailand saw two.

To download a copy of 'Chemical Compounds,' and for more information on PricewaterhouseCoopers' chemicals practice, visit http://www.pwc.com/chemicals.

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