In 2021, despite inflation, supply disruption and geopolitical risks, this did not have a significant negative impact on the chemical M&A market that year. In 2022, the geopolitical situation in Europe has brought great economic uncertainty, and many market participants are difficult to predict the prospects of enterprises. However, some market participants believe that as the demand outlook is still optimistic, they are still optimistic about the prospects of the global chemical M&A market this year, but the environment will be more complex.
M&A fever is expected to continue
Market participants said that although inflation, tight supply and the conflict between Russia and Ukraine have added considerable uncertainty to the economic outlook, the demand for chemicals is still high. Many chemical companies focus on meeting demand. This will encourage chemical enterprises to participate in M & A transactions.
Shawn Murray, managing director of Goldman Sachs, said that if compared with the data at the beginning of the COVID-19, the chemical M & A market in 2022 is optimistic and will continue to be hot. According to the data of chemical weekly, in the second half of 2020, with the strong rebound of the global economy, 138 chemical M & A transactions with a total value of $45billion were announced. In 2021, about 315 chemical M & A transactions with a total value of about US $116.4 billion were announced. At present, the market demand is still strong, and the hot momentum of chemical M & A market is expected to continue.
Murray said that although the market fluctuated greatly in 2021, it will also bring huge profits to the chemical industry, and the M & A valuation will also follow the global stock market to a new high. The M & A profit multiples of special chemical industries such as personal care, essence, pharmacy and life science often exceed 15 times, and some even exceed 20 times. Even the M & A profit multiples of general chemical products and intermediate products assets have reached double digits, higher than the historical level. Murray said that last year was the most active and valuable year for global chemical M & A since 2015-2016. Under the background that the market is still in the expansion period, the chemical M & A market in 2022 is still optimistic.
Increased economic uncertainty
It is undeniable that the current geopolitical and macroeconomic situation in Europe will indeed cool the M & A market. However, Murray believes that economic uncertainty is unlikely to lead to major changes in the macroeconomic situation. Even if the market cools down, it is difficult to change the hot expectations.
But the situation in Europe is more serious. The conflict between Russia and Ukraine and its economic impact are causing most European dealmakers to press the pause button. As Europe’s energy costs soar, bankers and executives are trying to assess asset risk. The direct impact of the war on North America was small, but it exacerbated the shortage of raw materials, energy and labor supply and inflation. Anthony George, managing director of chemicals and materials at TM capital, an investment bank, said: “the conflict has exacerbated the already difficult situation. The rapid rise in labor, inflation and raw material costs has led to a systematic rise in costs.” Murray also admitted: “the biggest obstacle to mergers and acquisitions is uncertainty, because we are in a very uncertain period.”
The European market is cooling down
Although the support conditions for mergers and acquisitions such as credit supply and cash reserves of private equity companies still exist due to the intensification of economic uncertainty, considering cost inflation and higher geopolitical risks, mergers and acquisitions prediction may be more difficult.
The impact of the conflict between Russia and Ukraine, the further disruption of the supply chain and the continued rise in energy prices have reduced demand growth expectations. S&p global market intelligence lowered its global GDP forecast for 2022 to 3.3% from 4.1% in February. Sarah Johnson, executive director of s&p global market intelligence, said: “the conflict between Russia and Ukraine has a direct impact on global commodities, which will further disrupt the global supply chain, push up prices and slow economic growth, especially in Europe.” The Russian economy will be subject to sanctions. In the United States, the withdrawal of foreign companies and the re emphasis on energy security have been permanently damaged. ” But she also said that the world economy has enough flexibility to avoid recession.
The conflict between Russia and Ukraine has the greatest impact on the European chemical industry. Murray said, “for some more downstream companies, despite the rise in raw material prices and freight rates, they are still able to pass on costs to downstream companies, which will not have a great impact on mergers and acquisitions. In contrast, the upstream chemical industry in Europe will face great difficulties.” Jared mucci, general manager of the chemical business of Piper Sandler, an investment bank, said: “if the impact of European energy prices reaches a critical value, mergers and acquisitions will be suspended.” Some chemical asset owners are also evaluating the impact. Roy cerosi, investment partner of Arsenal capital, said: “we spent a lot of time understanding the impact of conflict and the impact on different parts of our business, such as supply chain, logistics and energy costs.”
Interest rates have also attracted the attention of practitioners. In March this year, the Federal Reserve raised the benchmark interest rate by 0.25% to curb inflation, which may be the first in a series of interest rate hikes. However, so far, interest rates have little impact on mergers and acquisitions and leveraged loans.