The chemical industry has shown signs of M&A activity renaissance in the first half of 2021, with a total value of disclosed deals at $25.1 million, just under 61% of the 2020 total figure. High valuations have been another defining feature. Indeed, despite promising total value figures, the number of deals has been slow to pick up at 36 deals closed in the first half of 2021 against 67 in all of 2020. In this article, we have a broad look at the drivers of this M&A recovery as well as some of its implications.

Is M&A Really Booming?

First of all, it is important not to overstate the rate at which dealmaking has been growing in the industry. While the total value looked promising in H1 2021, a significant proportion was a contribution of a single deal — the merger between Dupont's Nutrition & Biosciences and IFF. Nevertheless, there was a significant buffer of disclosed but not closed deals in H1 2021 to indicate healthy growth. Notably, this would make 2021 the first year to show an increase in dollar value of M&A in chemicals since 2018.

Key Drivers

One driver is the desire of many to narrow down focus on particular sub-sectors. For example, the Covid-19 pandemic has lighten up interest towards the hygiene sector and driven up respective valuation multiples. An example of a company seeking to capitalise on the shift by focusing on hygienes is Lonza Group, who sold off LSI, its specialty ingredients arm, to private equity acquirers to focus on the healthcare market. The race to accomodate for vaccine manufacturing has been another factor pushing some to sell off non-core assets. A remote indicator of the prevalence of strategically driven  M&A as opposed to scaling-driven is the shift in the geographic nature of the market. Asia, the former leader in M&A activity by volume and value, has yielded to Americas in 2021, while Europe has gained a significant share.

Another motive for companies to sell assets is environmental concerns. Because a company's CO2 footprint is not necessarily reduced to achieve repetitional benefits, such reasoning will sometimes be left unquoted. Nevertheless, there has been a tendency of chemicals producers selling off businesses that contribute to a major proportions of their CO2 emissions. There is another side to this medal: such assets, similarly to oil and gas sites, are often acquired by companies who are unlikely to sustain the existing level of environmental efficiency in the long term. Think, for example, of Ineos and smaller companies buying up oil sites in the North sea.

Implications for Private Equity

In this seller's  market, one of the obvious types of victims is the private equity community, especially those of it with focus on chemicals. On one side of the market, corporates are selling arms at high valuations. At the other sit the corporate acquirers, who had been reluctant to spend during the pandemics. This capital is waiting for a new home. Thus, at high valuations, corporates have much more buying power compared to private equity funds, who's life is made even harder by public markets growing into the habit of breaking records. Disruption is sowed into private equity business models, too, forcing many to exit early to benefit from benign pricing.

Implications for VC and Effect on Public Markets Dynamics

Two final things to mention. First, its is likely that more chemical companies entering private market via SPACS — European private equity funds will consider the chance to win though arbitrage since valuations tend to be higher across the Atlantic. Second, entrepreneurs in the industry are the real winners in a seller's market. The reviving M&A market gives venture capital funds more opportunities, fuels demand on quality ventures and drives valuations. So far in 2021, VCs have closed 150 deals totalling $1.9 billion and approaching the $2.1 billion raised in 278 deals in all of 2020.

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