Downstream Tailwinds Spur Healthy Levels of Chemicals M&A
Capstone’s latest December 2023 Chemicals M&A Update reports that robust levels of manufacturing orders and declining input costs bode well for participants looking to expand production and capture heightened demand across high-growth pockets of the market.
The Chemicals sector has experienced a significant transformation in year-to-date (YTD) 2023, led by participants adjusting product portfolios, retooling supply chains, and advancing material innovation to adhere to downstream customer preferences. These preferences have often included feedstock choices and a clear imperative for decarbonization and sustainability. As a result of the recent market shifts, downstream demand for refined chemical materials has remained strong, all while input prices have fallen, resulting in a strong long-term growth outlook. The Plastics subsegment has enjoyed heightened demand, primarily driven by downstream, finished-product manufacturers looking for high performance materials and increasingly substituting metal components for high-grade plastic materials. Particularly attractive sub-sectors include Compounded Plastics, Specialty Plastics, and Masterbatch.
The current commodity price environment is expected to preserve the U.S. feedstock advantage for export competitiveness. With limited incremental OPEC+ (Organization of the Petroleum Exporting Countries Plus) supply year-over-year (YOY), the economies of scale for discounted Russian crude oil to Asian buyers could reshape the economics behind naphtha-based olefins. However, this has not yet materialized in a trade balance for global polymers. Unless the EU (European Union) or OPEC+ expands supply of natural gas and crude oil in the near-term, the U.S. is anticipated to maintain its feedstock advantage through year-end 2023 and into early 2024.
While merger and acquisition (M&A) activity in the sector has moderated to-date in 2023, Capstone expects deal volume to rebound in early 2024. Deal activity will likely be driven by a more favorable valuation environment for sellers while acquirers become accustomed to a higher cost of capital. Through year-end 2023, transaction activity will likely continue to mirror pre-pandemic levels as sector participants shore-up operations in anticipation of a market rebound. M&A volume has been supported by a well-capitalized strategic buyer pool, accounting for the majority (62.5%) of sector deals. Private strategics have comprised the lion’s share (40.6%) of engagements, with acquisition strategies often pertaining to bolstering margin strength and geographic presence. Sponsors have become increasingly selective in their acquisition pursuits due to a difficult transaction financing environment, comprising 37.5% of sector M&A deals to-date. A bright spot in the sector, the Plastics subsegment has enjoyed heightened demand through YTD 2023, primarily driven by downstream, finished-product manufacturers increasingly substituting metal components for high-grade plastic materials such as thermoplastic. As a result, purchasers of engineered plastic components and resins have demonstrated a low degree of elasticity, contributing to healthy levels of M&A activity and robust revenue gains.
Also included in this report:
• Which characteristics have boded well for sector participants looking to expand production and capture heightened demand.
• A breakdown on macroeconomic trends and the current commodity price environment that has prevented inventory normalization.
• What M&A targets in hot pockets of the market, such as Plastics and Food Ingredients, have done to garner attention and premium valuations from acquirers.
Capstone Partners’ Industrials Investment Banking Team provides M&A, capital formation, and financial advisory services to the owners of middle market businesses in the Chemicals sector. Our team partners with leading mid-to-large sized industrials and manufacturing businesses that serve growing end-markets. We ultimately look to work with companies that manufacture highly engineered products and differentiated services with an entrenched competitive position.
For more information on the Specialty Chemicals M&A Update featured in this report or to speak with one of our Industrials M&A Team members about how to grow, value, and/or sell your company, we are here to help. Contact us today to start a conversation.
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