pittsburgh chemical day 2017 bridging scale and ... · mergers & acquisitions to achieve...

Jordan Hesterman

October 2017

Bridging Scale and Diversification: M&A Outlook for the Chemicals Industry

Pittsburgh Chemical Day 2017

A.T. Kearney 10/52689d 2

The chemical industry remains in a state of significant transition

Overview of Global Chemical Landscape

Private & Public Owner’s Objectives

Mergers & Acquisitions to Achieve Objectives

Business Models & Governance

Chemicals Industry

Scale & Operational Excellence

Innovation

Digital Transformation

ConsumerCustomersSpecialtyDerivativesBuilding Blocks

Feedstocks


Investors are rewarding solution-focused chemicals companies with higher multiples than broad-based companies

EBITDA % vs. EV/EBITDA multiple of top chemical companies, average 2014-2016

Note: EV is enterprise value. EBITDA is earnings before interest, tax, depreciation, and amortization.Source: Bloomberg, A.T. Kearney analysis

Feedstock-focused Solution-focused Broad-based

0

5

10

15

20

25

30

35

Feedstock-focused commodity companies

Higher EBITDA margin than broad-based companies, but lower EBITDA multiples

Broad-based“classical chemical” companies

Solution-focused specialty companies “~60% higher EBITDA than broad-based companies and ~60% higherEBITDA multiples

124 6 8 10 14 16 18 20

EBITDA (%)

EV/EBITDA


2016 M&A activity reached a new record including a backlog of newly announced deals

12296

60

110

151

4972 82

187

94

43

43

49

48

3018

47

49

301

2013

128

2016

395

20152014

236

2011

14159

2009 2012

165

109

2010

7990

2007

139

2008

165

Completed deals of the year

Deals announced in that yearor before and not completed in that year

Thereof US$ 230 bn. newly announced in 2016, including Bayer/Monsanto, ChemChina/Syngenta, Praxair/Linde

Source: A.T. Kearney Chemicals M&A study 2017

1316171819

47

69

18

43

66

Praxair - Linde (2016)

Access-Ly ondell (2007)

ChemChina - Sy ngenta

(2016)

Bay er -Monsanto

(2016)

Dow -Rohm

& Haas (2009)

PotashCorp - Agrium (2016)

Merck -Sigma Aldrich (2015)

Akzo Nobel - ICI

(2008)

Air Liquide - Airgas (2016)

Dow -DuPont (2015)

Completed

Pending

Pending megadeals at the end of the 2016 and other large recent deals (USD bn)

Chemical Industry Announced and Pending Deals ($USD B)


Consolidation in key value chains has been a major theme in global chemicals M&A

1. Company allocation to segments defined by Capital IQ classifications and industry reports, followed by manual screening: Agrochemicals and Fertilizers split into separate segments; 2. Segment specific as far as available, based on Capital IQ or Coatings World; Source: Capital IQ, Coatings World, A.T. Kearney analysis

Paints & Coatings

FertilizersIndustrialGas

Agro-chemicals

Top Companies and FY2015 Revenues2

14%

86%

46%54%

38%

62%

40%

60%

Top 5 Companies

Next 15 Companies

CompanyRev enue($ bn)

Air Liquide 23.3

Linde 22.3

Praxair 10.8

Air Products 8.6

Taiyo Nippon Sanso 4.7

Air Water 2.7

Westfalen 1.8

Messer Group 1.3

Yingde Gases 1.2

SOL Group 0.8


Monsanto 15.0

Syngenta 13.4

Bayer Crop Science 11.3

DuPont Agriculture 9.8

Dow Ag. Sciences 6.4

BASF Ag. Solutions 6.4

FMC 3.3

Sumitomo Ch. 3.2

ADAMA 3.0

Nufarm 2.0


PPG Industries 14.2

AkzoNobel 10.9

Sherwin-Williams 10.2

RPM International 4.6

Nippon Pain 4.5

Valspar 4.4

Axalta 4.1

BASF Coatings 3.6

Kansai Paint 2.9

Asian Paints 2.3


China Co-op Group 21.7

Agrium 14.8

Yara 10.2

Mosaic 8.9

Yunnan Yuntianhua 7.7

PotashCorp 5.8

Israel Chemicals 5.4

OCP 4.8

CF Industries 4.3

SinoFert Holdings 4.0

Value Chain Consolidation (Revenue Consolidation by Top 20 Companies)

M&A Announced with Deal Value >$1bn as of 1Q17


Outlook: China and USA are the largest chemicals acquirer country with further activities expected in these two countries

24%

3%

20%

25%

11%

13%

5%

10%

32%

45%

China

South Korea

Germany

Japan

All others

5%

1%3%

UnitedStates

France

2003

4%

2016

46%3%Overall

IncreaseDecline

11% 61%

26%31%

26%14%

24%21%

27%21%

42%9%

17% 26%

6% 39%

23% 14%

North America

Latin America

Middle East& Africa

Western Europe

Eastern Europe(CEE and CIS)

India

Rest of Asia Pacific

China

Japan / Korea

1. The share of answers stating ‘Stable’ outlook is not graphically displayedSource: Survey responses, A.T. Kearney analysis

M&A Outlook

% of M&A Transactions Outlook: Development of M&A Activity by Regions(Share of Answers in Executive Survey in %1)

A.T. Kearney 10/52689d 71. Percentage of respondents who stated either driver or impedimentSource: A.T. Kearney executive survey; A.T. Kearney analysis

Several drivers support continued M&A, but chemicals executives see economic volatility as a potential disruptor

Top drivers and impediments of future M&A activity, share of executives selecting trend1

82%

61%

58%

57%

55%

Downstream integration of Middle Eastern Petrochemical players

Resurgence of chemical industry in the USA due to low cost feedstock

Balance sheet strength and liquidity of chemical companies

Emerging market players seekingaccess to advanced technologies

or application know-how

Limited returns on organic investment options

27%

29%

30%

31%

37%

Current level of valuations/multiples

Oil price

Increasing economic volatility

Politically-driven interventions

Global GDP growth

What’s providing tailwind to M&A?

What’s providing headwind to

M&A?


Specialty and fine chemicals remain the busiest segments, led by acquisitions from strategic investors

Development of M&A activity for sectors and investors(Results from executive survey in %)

Source: Survey responses, A.T. Kearney analysis

8%

24%

47%

33%

17%

63%

42%

33%

53%

28%

22%

5% 8%

6%

3% 3%

Financial investors 3%

State-controlled or state-driven players

3%

Strategic investors

Public Shareholders (IPO)

14%

6%

22%

40%

63%

67%

40%

26%

8%

6%

6%

Specialties andfine chemicals

3%

Petro andbasic chemicals

Trade and distribution

Decline 10-20% Increase 10-20%

Strongly decline >20% Strongly increase >20%Stable

Sectors

Investors


-6

-4

-2

0

2

4

6

8

10

12

14

16

18

20

-4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

SG

&A (

%)

Revenue growth (%)

Companies are struggling in successfully realizing SG&A cost synergies compared to their industry peers

Revenue growth vs SG&A growth 2007-2016(major chemicals serial acquirer companies)1,2

1. Companies chosen had more than 15 of acquisitions between 2007 and 20162. For companies yet to release the 2016 financials as of February 6th, the analysis was carried out with 2006-2015 financialsSource: A.T. Kearney Analysis; Capital IQ Company Financial Reports, Dealogic

DiversifiedOther

IncreasingSG&A share

DecreasingSG&A share


Activist focus on chemicals remained roughly stable in 2016 –Corvex was involved in the Bayer/Monsanto deal

Companies Publicly Subjected to Activist Demands(number of companies)

Source: Activist Insight, Reuters

Services

23%

Chemicals and other basic materials

21%Financial

16%

16%Technology

8%

Consumergoods

2%7%Healthcare

7%

Industrialgoods Other

20152014

673

2016

758

572

19% 16%19%

Chemicals and other basic materialsOther


From our perspective, buyers must learn and leverage practices to ensure their success in addressing common challenges

• Be aggressive in setting / demanding synergy targets• Continue to verify and refine estimates throughout the process

• Coordinate initiatives centrally, execute projects locally• Proactively identify risks that threaten to diminish value creation

Strong Integration Structure, Processes and Tools

Clear Synergy Targets Early and Transparency Over Time

• Communicate frequently to all stakeholders to minimize anxiety and pre-empt circulation of misinformation

Open, Frequent and Timely Communication

• Form the guardrails for M&A opportunities• Build the storyline for investors, employees and business partners

M&A Objectives Linked to Corporate Strategy

• Define and communicate new organization broadly• Align employees towards common objective

Clear Leadership and Direction

M&A Success Factors

• Develop a deeper understanding of the target’s industry and competitors• Find ways to leverage the unique capabilities and identify unique synergies

Unique Value Creation Strategy

• Define specific deal criteria refreshed linked to M&A objectives• Manage pipeline of potential targets and disciplined outreach program

Operationalized M&A Opportunity Research and Outreach

M&A Strategy Due Diligence Integration


Well organized mergers follow a purposeful approach to execution

A.T. Kearney’s Merger Integration Framework

Strategic Intent and Operating Model

■ Articulate deal rationale and objectives

■ Define the future state business model

Integration Management Office

(IMO)

■ Develop Master plan coordinated across teams which identifies and addresses interdependencies and risks

■ Track, manage and report on integration program progress and issues

Value Capture and Business

Integration

■ Build a plan to beat the committed synergy case and deliver quick wins to fund the program

■ Develop functional-level integration plans needed to enable the integration objectives

People Integration

■ Design organization structure, governance and culture to enable synergies and strategic objectives

■ Deploy a change and talent management plans to accelerate employee continuity, clarity and adoption to new ways of working


Diagnostic: do you have the right components in place? How powerful is your M&A engine?

Client exampleM&A Engine Diagnostic

Post-Merger Integration

Pre-Merger Planning

Due Diligence

Target Selection

M&A Strategy

PRE-MERGER POST-MERGER

1 2 3 4 5

Approaches & Tools

Structure & Governance

Capabilities & Resourcing

Knowledge Transfer

M&A Culture

Most effective Somewhat effective Least effective

Source: A.T. Kearney


Q&A

A.T. Kearney is a global team of forward-thinking, collaborative partners that deliver immediate, meaningful results and long-term transformative advantage to clients.

Since 1926, we have been trusted advisors on CEO-agenda issues to the world’s leading organizations.

Jordan Hesterman

[email protected]

979-575-5320

Thank You!

mailto:[email protected]


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