Chemicals and Specialty Materials Industry Update

Introduction

Harris Williams is pleased to present its chemicals and specialty materials industry update for Q3 2018. This report provides commentary and analysis on current market trends and merger and acquisition dynamics within the global chemicals and specialty materials industry.

Overall, M&A activity in the industry continues to benefit from (i) tremendous access to debt and equity capital, (ii) strong strategic activity as corporates both acquire and divest assets to achieve board directives, and (iii) ever-growing interest from generalist private equity firms.

Looking at the deals announced over the quarter, we continue to see a trend in favor of targeted transaction processes (relative to the historical breakdown of broad vs. targeted processes).  In our view, the frothy valuation environment combined with the depth of the current M&A cycle has served to better inform potential buyer landscapes, in turn allowing for efficient processes while still maximizing value.

We hope you find this edition helpful and encourage you to contact us if you would like to discuss our perspective or our relevant industry experience.

Q3 2018 By the Numbers1,2

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What We’re Reading

Former Akzo Nobel Chemicals Back to Market in 3-5 years: CEO3

Reuters   10/9/2018

"Akzo Nobel’s former chemicals subsidiary will likely return to the market as a standalone public company in three to five years, its new CEO Charles Shaver said on Tuesday.

Shaver said the company, which has been renamed Nouryon, will focus on growing revenues in China and the Americas and expects to spend up to €350 million ($400 million) annually to expand production."

Read the full article here.

A Tipping Point for the Chemicals Industry4

PricewaterhouseCoopers   9/25/2018

"The global chemicals industry has faced many challenges over the years, including declining margins, product commoditization, expanding competition in developing countries, and customers demanding more at lower prices. However, this year, the chemicals industry may soon be given a break and perhaps even see the first signs of a tipping point. Some chemical companies have begun to rethink their growth strategies, finally moving away from cost-cutting and retrenchment, toward more nimble, coherent, and aggressive business models, all driven by technology advances.

There are three interconnected strategic imperatives that could put the chemicals industry on a path to improved performance in the short-term and offer better prospects for long-term growth: realize value from M&A, solve the digital dilemma, and confront the challenge of “deglobalization.”"

Read the full article here.

Bull Run: Extended Upcycle in Europe’s Petrochemical Sector5

Chemical Week   9/24/2018

"The macroeconomic landscape for Europe is positive and supports growth in Europe’s petrochemical sector.  Producers are once more committing to significant capital expenditure.  Despite headwinds from higher feedstock prices and lower margins, the industry’s determination to invest remains strong."

Read the full article here.

Trump Trade Policy And Manufacturing: The Case Of The Chemicals Industry6

Forbes   9/20/2018

"According to the ACC, the Section 301 tariffs on China, which have already spurred retaliation by the Chinese, are a dangerous threat to the industry. In the second wave of U.S. tariffs imposed on Chinese products implemented in August, 54 percent of the products affected were in the chemicals and plastics industry. In its testimony to the U.S. Department of Commerce, the ACC notes that “significant disruptions of supply chains … would significantly disadvantage the competitiveness of U.S. manufacturers.”"

Read the full article here.

Univar Seeks Transformational Growth with $2B Nexeo Acquisition7

ICIS   9/20/2018

"U.S.-based chemical distributor Univar aims to become the premier global distributor of chemicals and ingredients with its planned $2 billion acquisition of Nexeo Solutions, Univar’s CEO said on Monday. 

“We have a tremendous opportunity to grow in a highly fragmented marketplace… We will have a broader, more comprehensive, more compelling product offering for our customers, and more reach for our suppliers,” said David Jukes, CEO of Univar, in a conference call with investors and analysts.  “We will have people able to prospect on more customers … to sell high, wide and deep in the marketplace. We expect this to augment our growth plan … This is all about growth,” he added."

Read the full article here.

Public Comparables8

As of October 3, 2018 ($ in millions, except per share amounts)​

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Public Markets Overview8

Chemicals and Specialty Materials Trading Statistics

As of October 3, 2018 (TEV / NTM EBITDA)

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Chemicals and Specialty Materials Index (12-Month Performance)

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HW Commentary

  • Chemicals and specialty materials public companies are currently trading at an overall median of 10.7x NTM EBITDA
  • Favorable quarter-over-quarter performance for many chemical manufacturers and distributors, resulting in part from successful price increases
  • Re-emerging trend of implementing strategic cost-cutting initiatives, driven in part by activist investors, expected to yield continued bottom-line growth going forward
  • Increased competitiveness in select geographies, namely China, coupled with above-average fluctuations in foreign exchange rates are top of mind for many multi-national players
  • Concerns over forward-looking profitability in light of recent trade tensions between the U.S. and China

M&A Transactions2,8

HW&Co. Deal Spotlight​

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Harris Williams advised Washing Systems LLC (Washing Systems), a portfolio company of Gryphon Investors (Gryphon), on its sale to Kao Corporation (Kao). The transaction was led by Patrick McNulty and John Lautemann of the firm’s Chemicals and Specialty Materials practice.

Washing Systems is a leading provider of specialty chemicals and technical services to the North American and European textile rental market. In addition to its innovative chemicals and high-touch customer service, the Ohio-based company has a proven track record of environmental stewardship and was the first for-profit enterprise to receive the Platinum Award (the highest award) from the Ohio Environmental Protection Agency in 2017.

Bob Grady, Partner at Gryphon and Head of the firm’s Industrial Growth Group, said, “The strong collaboration between Gryphon and WSI management helped further build the Company’s track record as a high-growth company that is an industry leader in both innovation and customer service. Through this transaction with Kao, Gryphon has achieved its goal of positioning WSI and its customers for continued growth and success.”

 

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Representative HW Chemicals & Specialty Materials Transactions

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1. American Chemistry Council

2. Mergermarket

3. Reuters

4. PricewaterhouseCoopers

5. Chemical Week

6. Forbes

7. ICIS

8. Factset