Jun 26, 2024

Chemicals Market Update – June 2024

Chemicals Market
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Manufacturing and Services Demand in the Chemicals Market Demonstrates Defensibility

Manufacturing demand in the Chemicals market has demonstrated resilience in 2024 as the sector emerges from a barrage of macroeconomic developments that impacted global chemical consumption. The lingering effects of inflation, lower demand forecasts from China, and destocking trends that dampened the Chemicals sector in 2023 have begun to subside, leading to an improved sector outlook. Of note, 88.6% of business owners surveyed in the Industrial & Manufacturing space had a positive or neutral outlook on the global economy, according to Capstone Partners’ Middle Market Business Owners Survey – 2023. Additionally, due to the breadth of attractive downstream markets, the Chemicals sector has been able to thwart declines in demand during economic ebbs and flows. In particular, Specialty Chemicals providers serving customers with exposure to high growth sub-sectors, including Coatings, Adhesives, Sealants, and Elastomers (CASE), Life Sciences, and Semiconductors, are anticipated to enjoy strong revenue growth, emphasizing the importance of high-performance, proprietary chemical solutions for attractive markets. Manufacturing output has grown year-over-year (YOY) with industrial production capacity rising to meet a resurgence in demand. Production capacity has notched gains of 1.8% between 2023 and 2024, according to the Board of Governors of the Federal Reserve System.1 The Industrial Production index (a measure of real output for all facilities in the U.S. involved in manufacturing, mining, electric, and gas utilities) reached 102.8 in April 2024 (2017=100), according to the Federal Reserve. This marks a full-percentage point increase from the start of 2024, demonstrating Manufacturing sector strength which has driven demand for chemicals. With this sense of optimism and end market strength, acquirers have continued to drive mergers & acquisitions (M&A) in the Chemicals sector to deliver scale, product mix expansion, globalization, and energy transition initiatives.

Interest in specialty chemicals players continues unabated, underpinning 2024 YTD middle market M&A activity. Companies that offer unique, high-performance chemical solutions into demanding end markets are particularly sought-after. Large strategic players continue to refocus their portfolios to emphasize specialty offerings and drive higher valuations.

Doug UsiferManaging Director, Capstone Partners

Chemicals Market M&A Records Strong 2024 Growth

M&A volume in the Chemicals market has risen to 74 deals announced or completed year-to-date (YTD), marking an increase of 10.4% YOY. The middle market (enterprise value <$500 million) has been especially active, with nine disclosed deals in YTD 2024 compared to two disclosed deals in the prior year period. The middle market has been targeted at an increased pace as players provide access to specialized, niche products and technology at a cost-effective and strategic scale. Private equity platform investments have accounted for the largest jump in deal activity, rising 166.7% YOY and representing five additional deals compared to the prior year period. This early rebound of private equity deal activity can be attributed to limited partner pressure to generate returns and deploy their significant dry powder reserves. For example, Wynnchurch Capital has been particularly acquisitive in YTD 2024, having closed two deals in the Chemicals sector. Private buyer activity, the largest portion of Chemicals M&A acquirers (45.9%), has risen 13.3% YOY. Furthermore, public strategics have notched one additional deal YOY while private equity add-ons have fallen by three deals or 16.7% YOY. M&A activity in the sector is expected to remain healthy through year-end as acquirers continue to demonstrate an appetite for proven businesses with scale.

Specialty Chemicals M&A Drives Sector Activity

Buyers have maintained significant interest in the Specialty Chemicals segment through YTD 2024. Specialty chemical manufacturers have accounted for 66.2% of targets or 49 deals announced or completed YTD. This represents a 28.9% increase compared to the prior year period. Valuations for specialty chemical businesses have averaged 10.2x EV/EBITDA between 2021 and YTD 2024. These multiples are expected to bolster deal flow among specialty chemical manufacturers throughout 2024 as buyers maintain an appetite for transaction activity.

In the chemical distribution segment, value-added distributors (VADs) continue to represent a vital component of the supply chain for chemical manufacturers and customers.  In addition to purchasing products from upstream manufacturers while tailoring products to specific customer needs, VADs operate warehouses and provide transportation, logistics, technology, product development and other specialty services. However, M&A in the segment has slowed (77.8% decline YOY), as lines between manufacturers and distributors have blurred since 2023 in the fragmented space. Nonetheless, distributors have continued to consolidate and add offerings for manufacturing businesses. Notable public industrial and specialty chemicals distributor, Brenntag (XTRA:BNR), has been an active acquirer in the Chemicals market. The Germany-based company has laid out its strategic M&A roadmap extending through to 2027 aimed at separating Brenntag Essentials and Brenntag Specialties into two independent and autonomous global divisions with honed profiles. Brenntag announced a commitment to double its M&A spend to ~$400-550 million per year, according to a December Capital Markets Day presentation.2 This has been demonstrated by three acquisitions through YTD 2024, adding to five acquisitions made in 2023. Notably, Brenntag acquired Lawrence Industries for an undisclosed sum in April. Lawrence distributes specialty chemicals, minerals, and catalysts for a range of markets across the U.K. and has annual revenues of $36.8 million, according to Capital IQ. The acquisition is expected to strengthen Brenntag’s position within Material Science and across the CASE sectors, as it diversifies its supply partners and high-quality portfolio of formulation and sustainability solutions.

Chemicals Market Participants Look to Reassess Portfolios

Chemicals market participants that have deployed an M&A strategy to create economies of scale, diversify specialty portfolios, leverage sustainability, and strengthen relationships with customers and suppliers. Capstone expects deal activity to remain strong through year-end as sector players continue to actively realign their asset portfolios, while private equity firms facilitate add-on acquisitions to bolster portfolio company positions in high-performing product classes and geographies. Notable transactions demonstrating these trends are highlighted below.

  • Hydrite Chemical Acquires Precision Polymer (April 2024, Undisclosed) – Hydrite acquired custom blend water treatment polymer manufacturer Precision Polymer Corporation (PPC) in April for an undisclosed sum. The acquisition of PPC has been paired with the acquisition of Fife Water Services (April, undisclosed), a water treatment and process products and automation provider. The acquisition expands Hydrite’s market reach in the Water Treatment segment within the Food sector as increased regulations and advancements in environmentally conscious practices continue to drive water remediation demand, detailed in Capstone's Industrial & Environmental Services Market Update – June 2024. The integration of automation and technology enhances Hydrite’s product offerings and initiatives to help control wastewater generation and energy use.
  • Apollo Global Management Announces Acquisition of U.S. Silica (April 2024, $1.9 Billion, 1.3x EV/Revenue, 4.7x EV/EBITDA) - In April, Apollo Global Management (NYSE:APO) announced its acquisition of U.S. Silica (NYSE:SLCA) for $1.9 billion, equivalent to 1.3x EV/Revenue and 4.7x EV/EBITDA. U.S. Silica is an industrial silica and diversified minerals producer used in the Oil & Gas industry. The take-private deal values U.S. Silica’s purchase price of $15.5 per share, an 18.7% premium from the closing share price as of April 25, 2024, according to a press release.3 U.S. Silica will continue operating under its brand and will maintain its current executive team.

"By partnering with Apollo Funds, we gain significant resources, deep industry expertise and enhanced flexibility as a private company to pursue the many market opportunities in front of us and invest in innovative capabilities that enable value-added offerings for customers. U.S. Silica has long benefitted from our large-scale production, high-quality reserve base, geographically advantaged footprint, low-cost platform, and strong customer relationships. Our ability to take this step from a position of strength is a testament to this excellent foundation and the dedication of our employees. I'm incredibly excited about the path ahead," commented Bryan Shinn, CEO of U.S. Silica, in the press release.

  • Schlumberger (SLB) Announces Acquisition of ChampionX (April 2024, $8.2 Billion, 2.2x EV/Revenue, 10.3x EV/EBITDA) – Innovative energy technology company, Schlumberger (NYSE:SLB) announced the acquisition of ChampionX, a global leader in oilfield chemistry solutions and allied engineering services. Champion X chemical products include advanced emulsion breakers, flow control products, drilling fluids and well injection formulations and equipment.  Enterprise value was $8.2 billion, equivalent to 2.2x EV/Revenue and 10.3x EV/EBITDA (April). Through the acquisition, SLB aims to leverage the ChampionX chemical solutions and engineering portfolio to maximize oilfield asset life cycle from completion to decommissioning. Annual pre-tax synergies post-close are expected to reach approximately $400 million within three years and SLB will look to return $3 billion to shareholders in 2024, according to a press release.4

“Our core strategy remains centered on meeting growing energy demand while accelerating decarbonization and emissions reduction through innovation, scale and digitalization in our core oil and gas business. This acquisition will expand SLB’s presence in the less cyclical and growing production and recovery space that is closely aligned with our returns-focused, capital-light strategy,“ noted Olivier Le Peuch, CEO of SLB, in the press release.

To discuss the dynamics of specialty chemical manufacturers, provide an update on your business, or learn about Capstone's wide range of advisory services and Chemicals market knowledge, please contact us.

Neve Adler, Analyst, was the lead Market Intelligence contributor to this article.


Endnotes

  1. Federal Reserve, “Industrial Production and Capacity Utilization,” https://www.federalreserve.gov/releases/g17/current/table11.htm, accessed May 29, 2024.
  2. Brenntag, “Capital Markets Day 2023,” https://corporate.brenntag.com/en/investor-relations/publications-and-events/capital-markets-day/, accessed May 29, 2024.
  3. PR Newswire, “U.S. Silica Enters Into Definitive Agreement to Be Acquired by Apollo Funds for $1.85 Billion,” https://www.prnewswire.com/news-releases/us-silica-enters-into-definitive-agreement-to-be-acquired-by-apollo-funds-for-1-85-billion-302128555.html, accessed May 29, 2024.
  4. SLB, “SLB Announces Agreement to Acquire ChampionX in an All-Stock Transaction,” https://www.slb.com/news-and-insights/newsroom/press-release/2024/slb-announces-agreement-to-acquire--championx-in-an-all-stock-transaction, accessed May 29, 2024

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