Specialty Chemicals Market M&A Update – July 2023

Value-Added Distributors Grow Increasingly Prevalent in Specialty Chemicals Market

The Specialty Chemicals market has experienced significant disruption, largely driven by shifting consumer preferences towards environmentally friendly products and sustainable production pathways. This transformation has spurred sector participants to adjust product portfolios, retool supply chains towards environmentally conscientious suppliers, and enhance material innovation. Supply chain retooling has led to more localized production with an emphasis on the balance between efficiency and quality. As a result, value-added distributors (VADs) have become a quintessential part of the Chemicals sector over the past three years, acting as intermediaries between manufacturers and Consumer end markets. Sector participants have focused on serving demanding chemical-intensive industries including Food & Beverage, Personal Care, Pharmaceuticals and specialty industrial sectors which have continued to capture steady demand. Robust consumer spending and easing market conditions will likely bode well for chemical VADs serving the Consumer space, with segment participants expected to capture heightened revenue and merger and acquisition (M&A) opportunities throughout 2023.

The global chemicals & plastics supply-chain is increasingly relying on value-added distributors (VADs) to provide critical services including access to high-value ingredients, logistics management and specialized blends and formulations.  These VADs are commanding more attention and valuation in the M&A marketplace.

Doug UsiferManaging Director, Capstone Partners

M&A Volume Normalizes, Valuations Remain Strong

M&A volume in the Chemicals sector has normalized through year-to-date (YTD), with 65 transactions announced or completed compared to 106 deals during the same period in 2022. Although YTD volume has declined 38.7% year-over-year (YOY), M&A activity in the sector has kept pace with pre-pandemic levels. Deal volume to-date has been primarily driven by buyers’ focus on sector participants serving high growth markets such as Food & Beverage, Personal Care, and Pharmaceuticals. Key end market exposure and strong margin profiles have continued to be prioritized investment criteria in the space, with many buyers exhibiting a willingness to pay premium valuations for targets that can shore up supply chains. Sector M&A valuations have exceeded the prior year, with the average sector purchase multiple amounting to 10.5x EV/EBITDA through YTD 2023, compared to the 2022 average of 9.9x EV/EBITDA. Healthy sector multiples may be indicative of a flight to quality assets, where companies with resilient margin profiles have commanded high valuations. In March, Solenis announced the acquisition of Diversey Holdings (Nasdaq:DSEY) for an enterprise value of $4.7 billion, equivalent to 1.6x EV/Revenue or 14.6x EV/EBITDA. Diversey Holdings specializes in providing cleaning and chemical products for the Industrial and Food & Beverage sectors. Diversey Holdings’ shareholders received $8.40 per share, which represents a 41.0% premium over the unaffected closing price on March 7, 2023, according to a press release.¹ Well established firms like Solenis will continue to attract premium valuations from buyers willing to pay elevated acquisition costs to purchase robust businesses. Strong valuations have led to an average sector enterprise value through YTD of $679.1 million. This represents an increase of 5.6% compared to YTD 2022 when excluding Apollo Global Management’s (NYSE:APO) announcement to acquire Univar Solutions (NYSE:UNVR) for $8.1 billion in March.

Strategic acquirers continued to account for the majority (61.5%) of sector transactions YTD, as private and public buyers have looked to increase production and distribution capabilities to meet increased demand. Strategic acquirers have increasingly targeted lower and core middle market businesses to bolster capabilities and add complementary products or services.

Private equity transactions have increased as a proportion of total deals, comprising 38.5% of YTD sector deals, representing a 3.2% increase compared to 2022. Private equity firms have namely focused on add-on acquisitions (30.8% of deals to-date) for portfolio companies serving defensible sectors such as Energy and Food & Beverage. These sectors offer a high degree of defensibility against elevated inflation and volatile market conditions. Of note, Pritzker Private Capital (PPC) Investment Partners-backed Aurorium acquired Centauri Technologies, a producer of organic chemical products used in the production of oil and gas, for an undisclosed sum (March 2023). PPC Investment Partners is expected to bolster Aurorium’s supply lines to support global energy companies. In another example, AIP-backed RelaDyne acquired Allied Oil & Supply for an undisclosed sum (March). Allied Oil & Supply provides industrial lubricants and related services. The acquisition of Allied Oil aligns with RelaDyne's current capabilities and expands the company's geographic reach to 11 U.S. states, according to a press release.² "RelaDyne’s geographic impact in the Commercial and Industrial sectors fully align and complements our existing reach in these segments, aiding in the diversification of products and services offered to our existing and future customers. RelaDyne’s core principles fully align with our company values of offering exceptional industry knowledge, customer satisfaction, and quality products and services," said Steve Phillips, President of Allied Oil, in the press release.

Value-Added Chemical Distributors Pique Healthy Buyer Interest

Acquirers have increasingly targeted chemical distribution businesses with value-added services. Distribution transactions have accounted for 26.2% of total YTD transactions, on pace with 2022 and up from 18.7% in 2021. VAD’s have been attractive targets in recent years, as buyers have looked to take advantage of elevated demand for chemicals across Industrial and Consumer markets. An increase in strategic and private equity buyer activity for VAD’s can likely be attributed to easing of supply chain obstacles that hampered segment businesses during the pandemic, as raw materials have become more readily available. Pandemic supply chain disruption stemming from global crises hampered sector growth for much of the last three years. “2022 was dominated by a highly challenging market environment. This includes the ongoing war in Ukraine and geopolitical uncertainties that had effects on global supply chains, increasing energy costs and rising inflation,” said Brenntag’s (OTCMKTS:BNTGY) CEO Christian Kohlpainter, on a company earnings call.³ Segment participants selling to the Pharmaceuticals and Food & Beverage sectors have been most attractive, driven by consumers’ shift towards cheaper, sustainable and more accessible food, beverage, and pharmaceutical products which rely heavily on chemical additives. Strategic and sponsor-backed buyers are expected to target VAD's with established supply chains and strong client relationships in order to increase product offerings.

Private strategic buyers have demonstrated a particular willingness to acquire VAD’s and chemical manufacturers, bolstering distribution channels and product capabilities. Of note, R.E. Carroll, a leading distributor of chemical additives, acquired RHD Polymer & Chemicals, a distributor of plastic additive chemicals for the Industrial and Food & Beverage sectors (January 2023, undisclosed). The acquisition is expected to expand R.E. Carroll’s reach in the Plastic Chemical Additives space. In another transaction, Mid-Cal Ag Aviation was acquired by TORtec Group (OTCPK:TRTK) (March 2023, undisclosed). Mid-Cal Ag Aviation produces a natural fertilizer that replaces mass-produced toxic fertilizers used in the Agriculture sector. Strategic acquires will likely look to continue to target chemical producers that have direct ties to Consumer end markets.

Buyers Target Value-Added Distributors with Consumer and Industrial End Market Exposure

Buyers have aggressively pursued acquisitions of market-leading chemical distributors that have strong client and supplier relationships, diverse product lines and, in many cases, intellectual property in the form of specialty blends or other formulations. Chemical distributors focusing on Consumer end markets have commanded heightened buyer interest and premium valuations. Outlined below are select transactions that highlight these trends:

• Apollo Global Management to Acquire Univar Solutions (March 2023, $8.1 Billion) – Apollo Global Management (NYSE:APO), a leading public investment firm based in New York, announced the acquisition Univar Solutions (NYSE:UNVR), one of the largest chemicals distributors, for an enterprise value of $8.1 billion, equivalent to 0.7x EV/Revenue and 8x EV/EBITDA. Univar shareholders will receive $36.15 per share, which represents a 20.6% premium over the unaffected closing share price prior to the announcement of the deal, according to a company press release.⁴ The sale is one of several transformative seen in early 2023, with large private equity and strategic firms willing to spend large amounts of capital to enter a growing North American chemical distribution supply chain.

"Over the last three years, we have transformed the company, putting the customer at the center of all we do, which has solidified our position as a leading value-added service and solution provider. This transaction reflects the success of our strategy and delivers substantial value to our shareholders," said Univar Solutions President and CEO David Jukes, in the company press release.

• Wind Point Advisors to Acquire Hasa (January 2023, Undisclosed) – In January 2023, Wind Point Advisors announced its acquisition of Hasa, a distributor of water treatment chemicals for industrial and consumer applications. Terms of the transaction were undisclosed. Wind Point Advisors is a Chicago, Illinois-based private equity firm that focuses on Consumer, Industrial, and Business Services industry brands. Wind Point is expected to add industry expertise and guidance to grow Hasa to a national brand.

“This exciting new partnership with Wind Point offers Hasa access to a comprehensive executive network, additional capital resources and professional expertise which will significantly accelerate our already impressive growth trajectory. The critical nature of our water treatment products necessitates an unwavering focus on quality and customer service. The partnership with Wind Point will further strengthen our leading manufacturing and distribution platform as we bring more products and services to existing and new markets,” said Hasa’s CEO, Chris Brink, in a press release.⁵

To discuss sector M&A activity, provide an update on your business, or learn about Capstone's wide range of advisory services and Chemicals sector knowledge, please contact us.

Endnotes

1. Solenis, “Diversey to be Acquired by Solenis for $4.6 Billion,” https://www.solenis.com/en/resources/news-releases/2023/solenis-diversey-agreement, accessed April 13, 2023.

2. RelaDyne, "RelaDyne Acquires Allied Oil," https://reladyne.com/reladyne-acquires-allied-oil/, accessed April 6, 2023.

3. Brenntag SE, “FY 2022 Results”, https://brenntagprod-media.e-spirit.cloud/06432017-be1f-41ce-8d1d-564e2a66d213/documents/corporate/investor-relations/2022/annual-report-2022/202303081400-brenntag.mp4, accessed May 12, 2023.

4. Univar Solutions, "Univar Solutions to be Acquired by Apollo Funds for $8.1 Billion," https://investors.univarsolutions.com/news/news-details/2023/Univar-Solutions-to-be-Acquired-by-Apollo-Funds-for-8.1-Billion/default.aspx, accessed April 11, 2023.

5. Wind Point Advisors, “Wind Point Partners Acquires Hasa,” https://www.wppartners.com/overview/wind-point-partners-acquires-hasa, accessed April 10, 2023.