CHEMICAL M&A OVERVIEW

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１．INTERNATIONAL CHEMICAL M&A OVERVIEW:
・PROFIT GROWTH DRIVING CHEMICALS EV/EBITDA MULTIPLES WHICH ARE RISING.
・HIGH TIER SPECIALTY CHEMICALS AND ADDITIVES COMPANIES MULTIPLES INCREASING TO 16X+ EV/EBITDA IN 2018.
・CHEMICAL COMPANY PROFITS REMAINING STRONG AS CONSOLIDATION CONTINUES.
・LITTLE TO SUGGEST THAT M&A ACTIVITY WILL CHANGE SIGNIFICANTLY – FORECAST FOR 2018/19 IS STRONG.
・CHINESE EXPANSION HAS BEEN ONE OF THE DRIVING FORCES.
・NUMBER OF QUALITY ACQUISITION TARGETS DECLINING DUE TO ONGOING INTERNATIONAL M&A – ATTENTION SHIFTING TO THE MID-MARKET AND SMALL CAP DEALS.

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２．EBITDA MULTIPLE GROWTH :
DRIVER FOR INCREASED EV IS INCREASING PROFIT. THIS IS INTUITIVELY OBVIOUS AS INCREASING CASH FLOW WILL ATTRACT INVESTMENT AS MOUNTING EXPECTED RETURNS WILL ACCRUE EITHER DIRECTLY TO SHAREHOLDERS THROUGH DIVIDENDS, SHARE BUYBACKS OR INCREASED SIZE AND THEREFORE VALUE.

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３．3 FACTORS UNDERPIN CHEMICAL COMPANY PROFITS :
・LOW INTEREST RATES = HAVE LOWERED COSTS AND SUPPORTED MORE DEBT ON BALANCE SHEETS, MORE CAPITAL EXPENDITURE AND M&A
・LOWER FEEDSTOCK AND ENERGY COSTS, ESPECIALLY IN THE US = THEREBY INCREASING PROFITS ACROSS THE ENTIRE CHAIN, MOSTLY FOR COMMODITY AND DIVERSIFIED COMPANIES
・CONSOLIDATION AND M&A, PARTICULARLY IN DOWNSTREAM SPECIALITY SECTORS AND ADDITIVES = RESULTED IN HIGHER GROWTH AND PROFITABILITY FOR THE FEW REMAINING AVAILABLE COMPANIES

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４．HIGHER VALUATION FOR SPECIALTIES VS COMMODITY PLAYERS:
・IT IS STRIKING HOW MUCH THE HIGHER TIER SPECIALTIES AND ADDITIVES SECTORS ARE BENEFITTING FROM AN INCREASINGLY POSITIVE CASH FLOW OUTLOOK FOR THE SECTOR. SPECIALTIES ARE DRIVING MUCH OF THE TRADING MULTIPLE UPLIFT WE ARE WITNESSING IN CHEMICAL STOCKS (NOTE HOW CLOSELY TRADING MULTIPLE FOLLOWS PROFIT GROWTH FOR HIGH TIER SPECIALITIES).
・COMMODITY AND DIVERSIFIED HAVE SHOWN LIMITED EV/EBITDA MULTIPLE INCREASE, AS ANY CASH FLOW GROWTH IN THESE SECTORS HAS BEEN PARTIALLY NEGATED BY INCREASING CHINESE COMPETITION AND LOWER OIL PRICES. THIS SPLIT BETWEEN HIGHER GROWTH DOWNSTREAM AND LOWER GROWTH UPSTREAM COMPANIES HAS NOW BECOME QUITE MARKED AND INVESTORS HAVE PERHAPS DIVIDED THE MARKET TOO STARKLY. THE PERFORMANCE OF MANY DIVERSIFIED AND COMMODITY COMPANIES PROBABLY WARRANTS MORE REWARD, BUT WITH INVESTORS FOCUSED ON GROWTH THIS IS UNLIKELY TO CHANGE ANYTIME SOON.

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５．CONSOLIDATION:
・A KEY ELEMENT OF THE EBITDA GROWTH HAS BEEN CONSOLIDATION ACROSS THE DOWNSTREAM CHEMICALS SECTORS. RECENT TRANSACTIONS SUCH AS: H.B.FULLER – ROYAL ADHESIVES / BAYER – MONSANTO AND THE DOW/DUPONT AGRO / NOVACAP ACQUISITION OF PCAS AND CHEMOXY
・THE LEVEL OF CONSOLIDATION AND THE DECLINING LEVEL OF M&A OPPORTUNITIES HAVE ONLY SERVED TO INCREASE BOTH THE EXPECTED MULTIPLE AND ALSO THE LEVEL OF PROFITABILITY. THIS VIRTUOUS CIRCLE (FROM THE SELLER’S VIEWPOINT) OF RISING PURCHASE PRICES WILL LIKELY CONTINUE UNTIL THE CONSOLIDATION HAS PLAYED OUT.
・OUR EXPECTATION IS THAT CERTAIN SUB-SEGMENTS WILL SHOW ACCELERATED CONSOLIDATION IN THE NEXT FEW YEARS. SPECIFICALLY, ELECTRONIC CHEMICALS, ADHESIVES AND SEALANTS, FOOD INGREDIENTS AND COATINGS ARE POTENTIALLY AT THE FOREFRONT OF THE CONSOLIDATION TREND WITH A CONVERGENCE OF FACTORS SUPPORTING INCREASING M&A ACTIVITY; LARGE COMPANIES SEEKING TO ACQUIRE HIGHER GROWTH BUSINESS, INCUMBENTS WANTING TO GROW AND END MARKETS BENEFITING FROM GLOBAL MEGA-TRENDS. IN ADDITION, SPECIAL FACTORS WILL ALSO INFLUENCE THE SPEED OF CONSOLIDATION. FOR EXAMPLE, ELECTRONIC CHEMICALS HAVE RAPIDLY RISING R&D COSTS AND ALSO CHANGING COMPETITIVE DYNAMICS WITH THE EMERGENCE OF VERSUM AND DOWDUPONT. ADHESIVES AND SEALANTS HAVE BEEN THE MOST ACTIVE RECENTLY AS ARKEMA, H.B. FULLER AND HENKEL CONTINUE TO CONSOLIDATE A FRAGMENTED SUPPLY BASE WHILE EXTRACTING SIGNIFICANT SYNERGIES.