Strengthening End Markets Support the Recovery of Chemicals Demand
M&A activity in the Chemicals & Plastics sector is robust this year, driven by pent-up demand combined with more high-value businesses coming to market. Businesses with defensible, high margins that serve attractive, high growth market sectors (such as Food & Beverage, Cleaning & Sanitation and Advanced Materials) are enjoying premium valuations.
Merger and acquisition (M&A) activity in the Chemicals industry has accelerated in 2021, outpacing the same period in 2020 and 2019 by 69.1% and 72.6% respectively. Deal flow is expected to remain robust in the near-term with strategic buyers seeking consolidation opportunities and financial sponsors flush with capital that needs to be deployed. Private and public strategic buyers have accounted for 73.8% of transactions year-to-date (YTD) and have demonstrated an appetite for chemical manufacturers and distributors with product portfolios serving high-growth end markets. A recent example of this was Kemin Industries, a manufacturer of specialty ingredients for humans and animals in the Feed and Food industries, acquisition of Bio-Cide International Inc. (May 2021, deal terms not disclosed). Bio-Cide is a manufacturer of chlorine-dioxide based antimicrobial technology. By acquiring Bio-Cide, Kemin is positioned to benefit from the healthy living megatrend which has been bolstered by the pandemic as consumers have increasingly prioritized preventative health. Additionally, Kemin has added several new technologies to its portfolio of antimicrobial and food safety solutions, according to a press release.1
Strategic buyers have also leveraged M&A to augment product portfolios and form synergies to improve sales growth and achieve economies of scale. In June, Kerry Group plc (ISE:KRZ), a leading provider of taste and nutrition solutions, reached an agreement to acquire Niacet Corporation from SK Capital Partners. The transaction is valued at $1.0 billion, equivalent to 15.4x EBITDA excluding synergies. Niacet Corporation manufactures chemical products for the Food and Pharmaceutical industries. The transaction is expected to be accretive to adjusted earnings per share in year one and result in revenue synergies that will enable Niacet to deliver at least mid-to-high single digit volume growth, according to a press release.2 Through the acquisition, Kerry will benefit from Niacet’s complementary product portfolio, enhancing its market position in the growing Food Protection & Preservation market. Kerry will also benefit from Niacet’s clean label solutions offerings due to heightened consumer awareness surrounding food safety and sustainability.
Due to its historically fragmented structure, the Specialty Chemicals industry can represent an attractive buy-and-build opportunity for financial buyers. Financial add-ons comprised 18.3% of deals YTD as private equity firms looked to enhance the market position of portfolio companies. With an abundance of capital chasing deals, private equity firms are expected to be more acquisitive in the Chemicals industry in the near-term. Capstone also expects that chemical companies will continue to divest non-core assets to optimize portfolios, representing an opportunity for private equity investors to establish and develop platforms. Notably, Lonza AG, a subsidiary of Lonza Group Ltd (SWX:LONN), entered a definitive agreement to sell its Specialty Ingredients Division, Lonza Specialty Ingredients, to a consortium comprised of Bain Capital Private Equity, LP and Cinven Limited, for an enterprise value of $4.7 billion (February).
Recovering Construction and Manufacturing Sectors to Drive Demand for Chemical Wholesalers
Capstone expects the positive near-term outlook in Construction and Manufacturing sectors to translate into heightened demand for Chemical inputs. End users within the Construction and Manufacturing sectors are the largest consumers of chemical inputs and play a key role in determining Chemical Distribution demand. The strength of the Residential construction market bodes well for robust input demand, as privately-owned housing starts reached a seasonally adjusted annual rate of 1,572,000 in May, improving 50.3% year-over-year (YOY), according to U.S. Census Bureau data.3 In addition, strength in non-residential construction end markets is evidenced by the Associated Builders and Contractors' Construction Backlog Indicator rising to 8.0 months in May, pointing to continued healthy near-term construction activity despite rising material and labor costs, bolstering demand for chemical inputs.4 Rising production in the Manufacturing sector is also expected to support elevated demand for Chemical inputs. Of note, the Industrial Production Index which measures real output for all facilities in the U.S. involved in manufacturing, mining, and electric, and gas utilities has increased 16.3% YOY through May, according to Board of Governors of the Federal Reserve System data.5
Automotive Industry to Fuel Demand for Petrochemicals
Anticipated elevated demand for petrochemicals is supported by the strength of the global Plastic Resin sector, which is forecast to reach a market size of $975.4 billion in 2028 expanding at a 4.2% compound annual growth rate (CAGR) between 2021-2028, according to Grand View Research.6 Petrochemical distributors provide inputs derived from petroleum-based feedstock for plastic resins. While plastic resin demand was primarily fueled by the production of Personal Protective Equipment (PPE) for the Healthcare sector during the pandemic, the Automotive industry has increasingly utilized plastic resins due to the material's lightweight and inexpensive properties. Technological advancement in the Automotive industry is anticipated to drive demand for petrochemicals in the foreseeable future as manufacturers look to reduce costs and improve vehicle efficiency.
Rising Input Prices to Dampen Profit Margins in the Near-Term
Although plastic resin manufacturing is forecast to supplement demand for petrochemicals, high oil prices and feedstock cost increases are expected to dampen near-term profit margins for distributors and manufacturers that depend on petrochemical-based raw materials. Oil, which is the primary input in the Commodity Chemicals industry, has experienced significant price growth fueled by tightening supply associated with government-induced production shutdowns at the onset of the pandemic. In addition, a deep freeze that occurred in the U.S. Gulf Coast in mid-February further reduced oil supply with producers forced to shut down operations again. Constrained production has made it difficult for the U.S. to replenish feedstocks, resins, and intermediates that were depleted by the February deep freeze and subsequent plant shutdowns. Price growth has continued through YTD with West Texas Intermediate futures reaching its highest level in six years at $76.90 per barrel on June 29th, according to ABC News.7 As the economy continues to reopen, global oil demand is projected to return to pre-pandemic levels by the end of 2022, rising 5.4 million barrels per day (mmb/d) in 2021 and an additional 3.1 (mmb/d) in 2022, according to the IEA Oil Market Report.8 However, input prices for resins and intermediates are expected to normalize in the long-term as oil suppliers ramp up production to meet the current high demand and ease the tight supply situation.
Cision, "Kemin Industries Acquires Bio-Cide International," https://www.prnewswire.com/news-releases/kemin-industries-acquires-bio-cide-international-301285869.html, accessed June 28, 2021.
Kerry Group, "Kerry reaches agreement to acquire Niacet for €853m," https://www.kerrygroup.com/media/Kerry-reaches-agreement-to-acquire-Niacet-for-853m.pdf, accessed June 28, 2021.
U.S. Census Bureau, "Monthly New Residential Construction, May 2021," https://www.census.gov/construction/nrc/pdf/newresconst.pdf, accessed July 1, 2021.
Associated Builders and Contractors, "ABC's Construction Backlog Inches Higher in May; Materials and Labor Shortages Suppress Contractor Confidence," https://www.abc.org/News-Media/News-Releases/categoryid/1061/Default, July 2, 2021.
Board of Governors of the Federal Reserve System, "Industrial Production and Capacity," https://www.federalreserve.gov/releases/g17/current/default.htm, accessed June 28, 2021.
Grand View Research, "Plastic Resins Market Size, Share & Trends Analysis Report By Product (Crystalline Resin, Engineering Plastic), By Application (Packaging, Medical Devices), By Region (China, APAC), And Segment Forecasts, 2021-2028," https://www.grandviewresearch.com/industry-analysis/plastic-resins-market, accessed July 2, 2021.
ABC News, "Gas Prices Climb as Crude Oil Briefly Hits Highest Prices in 6 Years," https://abcnews.go.com/Business/gas-prices-climb-crude-oil-briefly-hits-highest/story?id=78688061, accessed July 6, 2021.
IEA, "Oil Market Report - June 2021, " https://www.iea.org/reports/oil-market-report-june-2021, accessed July 2, 2021.
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