The chemical industry is in upheaval with merger and acquisition transactions up for the fourth year in a row in 2015. Bayer’s bid for Monsanto, the world’s largest seed company, marks a new high in the consolidation gripping the sector.
In an interview with Handelsblatt, the chief executive of Cologne-based specialty chemicals company Lanxess, Matthias Zachert, predicted mergers would continue.
“Several factors play a role. Firstly the changes in raw materials prices and the reindustrialization of the U.S.,” he said. “In addition, countries in the Middle East are stepping up their efforts to refine their fossil raw materials themselves. Added to that comes the fact that China has become self-sufficient in many products and is starting to export them. That’s also happening in the chemicals industry and will increase. Against that background many companies in the sector must reposition themselves.”
Chinese companies were investing in Europe and in the U.S. to enhance their technological base and secure a foothold in Western markets, said Mr. Zachert.
He noted that it made sense for German companies to join in the consolidation given their strength in the chemicals sector — and that even at the current high purchase prices, acquisitions made sense.
“The high valuations are closely linked to financing conditions,” he said. “In high-interest rate phases valuations go down, in low-interest phases they go up. And the current low-interest situation will likely persist in the next few years. That means acquisitions still allow increases in earnings per share despite the higher prices. And if synergies are realized on top of that, it strengthens the rationale immensely.”
The purpose of most of these acquisitions is to move the business into higher-value product segments.
Lanxess is the fifth-largest chemicals business in Germany, created in 2004 from a Bayer spinoff. Mr. Zachert took up his post leading Lanxess in 2014. He previously worked as its chief financial officer but then spent three years at Merck Group. On his return to Lanxess, Mr. Zachert faced a crisis in the rubber business due to overcapacities on the market.
Bayer’s bid for Monsanto is the biggest but by no means the only European acquisition of a North American player. A few weeks ago Essen-based specialty chemicals group Evonik purchased the performance materials unit of U.S. group Air Products for some €3.5 billion.
Lanxess bought the disinfectant and hygiene product ingredients business of U.S. peer Chemours for about €210 million.
Last year Darmstadt-based Merck group agreed to buy U.S. laboratory chemicals producer Sigma-Aldrich for around $17 billion, and Belgium’s Solvay acquired U.S. company Cytec, a composite materials maker, for $5.5 billion.
The purpose of most of these acquisitions is to move the business into higher-value product segments or to strengthen one’s position in these more lucrative areas.
The volume of transactions also appears to be increasing within Europe. Dutch group Akzo in February agreed to buy the industrial coatings business of Germany’s BASF, and French group Arkema bought adhesives producer Bostik from its former parent company Total.
There are a number of reasons for the trend. The scope for organic growth in the sector is limited and there’s mounting pressure on companies to focus more on higher-profit market segments.
Analysts at consultancy A. T. Kearney said many chemicals companies will try to reinforce their position in high-value businesses and to divest weaker divisions.
Solvay Chief Executive Jean-Pierre Clamadieu said the Cyrtec takeover was a “leap forward.” The company had previously spun off its PVC business into a joint venture with British company Ineos and then pulled out of the business completely.
It was a similar story with Bayer and Lanxess. Bayer in 2015 spun off its plastics division Covestro and plans a complete sale of the subsidiary, while massively reinforcing its agrochemicals business with the bid for Monsanto.
Lanxess last year sold 50 percent of its synthetic rubber business to Saudi oil giant Saudi-Aramco and used the proceeds to expand its remaining specialty chemicals businesses.
The growing presence of activist investors is a further factor driving merger activity. This brand of vocal shareholders, who are particularly influential in the U.S., are pushing companies to focus their businesses more — that’s what happened with the U.S. groups Dow and Dupont, which plan to split themselves into three firms after their merger. Even before the tie-up, investors had pushed the firms to spin off and sell a number of divisions.
Mr. Zachert, the head of Lanxess, said a Bayer takeover of Monsanto would have “neutral” impact on his company, whose subsidiary Saltigo mainly made ingredients for herbicides, not for seeds.
The Dow/Dupont merger would also be “neutral to positive” for Lanxess, he said.
The mergers underway would likely add pressure on the producers of intermediate materials to consolidate, but the players in that industry weren’t so big, said Mr. Zachert.
“In addition we with Saltigo are active in technologically higher-value molecules and are already one of the leading suppliers in Europe.”
He added: “We want to further expand our strong position in intermediate and performance products as well as high-performance plastics and see good prospects of doing that. We took a first step to expand recently with the agreement to purchase the disinfection business of Chemours.”
Siegfried Hofmann covers the chemicals and pharmaceuticals sectors for Handelsblatt. To contact the author: [email protected]