us_m&a-2010-2011
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Grace Matthews, Inc. 219 North Milwaukee Street, 7th Floor Milwaukee, Wisconsin 53202 414.278.1120 gracematthews.com
IN MEDIA RES (IN THE MIDDLE OF THINGS):
U.S. CHEMICAL INDUSTRY 2010 - 2011
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Grace Matthews’ chemical investment banking
group provides merger, acquisition, and
corporate finance advisory services for basic
and specialty chemical manufacturers
worldwide.
WWW.GRACEMATTHEWS.COM
JOHN BEAGLE MANAGING DIRECTOR [email protected]
BENJAMIN SCHARFF DIRECTOR [email protected]
THOMAS C. OSBORNE SENIOR EXECUTIVE [email protected]
KEVIN YTTRE VICE PRESIDENT [email protected]
ANDREW HINZ VICE PRESIDENT [email protected]
TRENT MYERS VICE PRESIDENT [email protected]
ANDREA WOLF ASSOCIATE [email protected]
AARON POLLOCK ANALYST [email protected]
Grace Matthews’ chemical investment banking
practice is global in scope and well-known for
its strong track record of successful chemical
industry transactions dating back to the early
1990s. We have direct ties to chemical industry
leaders worldwide, and have completed
transactions with such companies as Akzo
Nobel, 3M, DuPont, Sherwin-Williams, PPG
Industries, Ashland, Ceradyne, DSM, ICI,
Borregaard, Air Products, Landec Corporation,
The Home Depot, Hexion Specialty Chemicals,
Atofina Chemicals, Brush Engineered Materials,
Becker Industrial Coatings, RPM International,
Courtaulds, Domino Sugar, and Chr. Hansen
Laboratories, as well as many of the world’s
leading private equity firms.
Grace Matthews’ three main practice areas
are sell-side transactions (private companies,
divestitures for large multi-national corporations
and private equity owned businesses); buy-side
projects (typically for major multi-nationals); and
financing, where we raise debt and/or equity
capital to support private equity sponsored
management buy-outs or recapitalizations.
CONTACT INFORMATION
GRACE MATTHEWS, INC.
219 NORTH MILWAUKEE STREET
7TH FLOOR
MILWAUKEE, WI 53202
P: 414.278.1120
F: 414.278.1119
WWW.GRACEMATTHEWS.COM
GRACE MATTHEWS CHEMICAL PRACTICE
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CONTENTS
KEY TAKEAWAYS 4
IN MEDIA RES
THE REBOUND
THE GRACE MATTHEWS CHEMICAL INDEX
U.S. CHEMICAL INDUSTRY: A GRAPHICAL OVERVIEW 5
IN MEDIA RES (IN THE MIDDLE OF THINGS): 6
U.S. CHEMICAL INDUSTRY 2010 - 2011
THE REBOUND 16
CHEMICAL M&A 2010 - 2011
2010 - 2011 CHEMICAL INDUSTRY SELECTED TRANSACTIONS
THE GRACE MATTHEWS CHEMICAL INDEX:
VALUATIONS OF PUBLICLY TRADED CHEMICAL FIRMS 23
GRACE MATTHEWS SPECIALTY CHEMICAL TEAM 27
GRACE MATTHEWS RECENT CHEMICAL TRANSACTIONS 28
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KEY TAKEAWAYS
IN MEDIA RES
There was a pause in the economic recovery mid-way through 2010, but improving
economic indicators in the fall provided evidence that a sustainable recovery is underway.
Significant risks that remain include high levels of sovereign and consumer debt, high
unemployment, burdensome regulation, and weakness in the housing market.
There is a possibility of new asset bubbles resulting from the Federal Reserve’s monetary
policy. Rising prices in commodities, common stocks and U.S. farm land indicate either that
asset bubbles may be forming or significant inflation is ahead.
Uncertainty over the economic outlook will act as a constraint on new investment and
dampen the speed of recovery.
Chemical manufacturers have strong balance sheets and the means to invest in new assets,
but they will be reluctant to do so as long as they have excess capacity and there is anemic
“pull through” demand in the end markets.
A slow growth economy means that top line growth for chemical companies is going to be
restrained, and that the robust profit growth we have seen over the past two years will
eventually fade and begin to track GDP growth.
THE REBOUND
Led by strategic acquirers, chemical M&A rebounded strongly in 2010 after a lackluster 2008
and 2009.
Financial buyers began to return to the markets in the second half of 2010, as their access to
credit continued to improve.
There have been a few large strategic deals, but the focus seems to be more on small or mid-
size “bolt-on” transactions.
The M&A environment in 2011 looks very strong, with high-quality assets coming to market and
generating competition between strategic and financial buyers.
THE GRACE MATTHEWS CHEMICAL INDEX
The Grace Matthews Chemical Index tracks the earnings and valuation multiples of 40
publically traded chemical firms and segments data by market size and industry groups.
Valuations of chemical firms are value tilted, with lower multiples of earnings and book value
than growth industries such as healthcare, technology, and media.
Chemical valuations began to fall as the U.S. entered the recession, though earnings
continued to climb for another year.
The recession affected the valuations of chemical companies disproportionately, with smaller
firms’ multiples declining more than larger, more diversified companies.
Earnings multiples have shown a classic “V” shaped recovery since the spring of 2009, with
valuations increasing faster than earnings because of the anticipation of robust earnings
growth going forward.
Recovering from a mid-year downturn in 2010, equity markets now appear to be pricing in a
robust future profit cycle.
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Chemical Industry Value of Shipments:
January 2008 – January 2011
Source: U.S. Census Bureau
45,000
50,000
55,000
60,000
65,000
70,000
U.S. Chemical Railcar Loadings:
December 2009 – February 2011
Source: American Association of Railroads
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
Chemical Production and Capacity Utilization:
January 2008 – January 2011
Source: Federal Reserve Board
62%
64%
66%
68%
70%
72%
74%
76%
78%
80%
80828486889092949698
100102
Producer Price Index:
January 2008 – December 2010
Source: Bureau of Labor Statistics
180
190
200
210
220
230
240
250
Ratio of Chemical Industry Inventories to Shipments:
January 2008 – January 2011
Source: U.S. Census Bureau
1.00
1.05
1.10
1.15
1.20
1.25
1.30
1.35
1.40
U.S. Chemical Industry Enterprise Value/EBITDA:
January 2005 – January 2011
Source: Grace Matthews, Inc.
3.5
4.5
5.5
6.5
7.5
8.5
9.5
Large Cap Mid Cap Small Cap Micro Cap
INVENTORIES
CHEMICAL INDUSTRY PPI REVENUES
ENTERPRISE VALUE/EBITDA
U.S. CHEMICAL INDUSTRY A GRAPHICAL OVERVIEW
PRODUCTION AND CAPACITY TRENDS
Capacity Utilization
(Right Axis)
Production
(Left Axis)
RAILCAR LOADINGS
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IN MEDIA RES (IN THE MIDDLE OF THINGS) THE ECONOMY AND THE CHEMICAL INDUSTRY 2010 - 2011 Economics is often called the “dismal science”: a term that originated in the 19th century in
response to the writings of Thomas Malthus, who famously predicted that unchecked population
growth would ultimately lead to mass starvation. Of course, Malthus could not have been more
wrong, but the term has persisted, probably because economics may be the most inexact of the
social sciences, and economic “forecasts” that predict the end of civilization tend to be the ones
that actually get the public’s attention.
At any one time, there are so many competing forecasts out there that usually at least one is going
to turn out to be correct, if only because of the laws of probability. So when an economist
accurately predicts an economic crisis, they become rock stars, sought after for appearances on
CNBC and Bloomberg, and virtually guaranteed big advances on their next book. So it was with
Nouriel Roubini and Meredith Whitney in predicting the onset of the subprime/financial crisis of
2008, and before them Robert Shiller in predicting the bursting of the tech stock bubble in 2000.
Notwithstanding the obvious intelligence of these economists, we will never truly know if they had
some special insight that eluded so many others, or if their number simply came up; that is, they
had the “right” idea at the “right” time. If it hadn’t been them, it would have been someone else.
Thinking about it this way probably doesn’t give them the credit they deserve, but it does serve as
a reminder that getting it right once is no guarantee that they can do again. Those who
remember the stock market crash of 1987 may remember Elaine Garzarelli, who as an analyst at
Shearson Lehman Brothers called the crash a week before it occurred. As head of her own
consulting firm in 2003, and just prior to the beginning of the 2003-2007 bull market, she predicted "a
stock market stuck in a holding pattern for years.”1
1 BusinessWeek, March 24, 2003
Figure 1: S&P 500 January 2010 – March 2011
Source: Standard & Poors
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Figure 2: VIX Index (CBOE Volatility Index)
January 2008 – March 2011
Source: Chicago Board Options Exchange
0
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It’s especially important now to keep this in mind, because ever since the recovery began in the
spring of 2009, there have been any number of compelling and conflicting scenarios for the future
of the U.S. economy. Can we expect a continuing recovery or double-dip recession? A stronger or
weaker dollar? Is significant inflation inevitable? Or should we worry about deflation instead? It
hasn’t helped that the federal government’s response to the economic crisis has had few historical
precedents, or that scheduled releases of economic data are too eagerly anticipated by legions
of analysts, all wanting to be the first to see the new pattern, and who conveniently forget that the
real trend is visible only in retrospect.
Our collective indecision about the direction of the economy is reflected clearly in the
performance of the stock market. (Figure 1) At the beginning of 2010, the markets continued the
steady advance that would last for more than a year since the bottom in March 2009, with the S&P
500 finally closing over 1200 in April 2010. After that it was a bumpier ride, with big down moves in
May-June (-11.0%) and August (-4.0%) interrupted by a big up move in July, (+9.5%), before a
steady drumbeat of good economic reports (along with a big assist from the Fed’s QE2 policy)
resulted in a sustained rally that began in September and which continues today.
The markets’ bipolar mood swings are really evident in the VIX, the CBOE Volatility Index.2 (Figure 2)
In late spring of 2010, the VIX reversed an 18 month downtrend and spiked upwards in response to
the European sovereign debt crisis, first in Greece and then in Ireland. The VIX settled back to a
range between the teens and low 20s in the fall as the stock market continued its advance and the
economy continued to improve. It’s surprising that the recent uprisings in the Middle East and the
Japanese Tsunami/Nuclear Crisis have not caused another spike in VIX, but so far there has been
2 The VIX is a measure of the expected of volatility of the S&P 500 index over the next 30 days, and is based on the
volatility expressed in index put and call options. Although the VIX is sometimes called the "fear index", high values are
not necessarily bearish. The VIX really measures the inherent risk of the market, such that high readings only mean
investors expect that the market soon will move sharply in either direction.
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Figure 3: Chemical Industry Value of Shipments January 2008 – January 2011
Source: U.S. Census Bureau
45,000
50,000
55,000
60,000
65,000
70,000
Figure 4: US Railcar Loadings of Chemicals January 2007 – January 2011
Source: American Association of Railroads
0
5000
10000
15000
20000
25000
30000
35000
40000
only a modest uptick to the mid-20s.
This could change if the situation in
the Middle East or Japan takes an
unexpected turn, and oil prices rise
above $125 per barrel, a level that
many economists believe could cause
the recovery to stall. Spikes in the VIX
continue to remind us that optimism
about the recovery should be
tempered by an awareness of “tail”
risk: events - often geo-political -
which cannot be predicted and
which deliver an unanticipated shock
to the economy.
As would be expected, the chemical
industry reflects what’s going on in the broader economy. Chemical firms reported strong
revenues and earnings in the last half of 2009 and the first quarter of 2010. (Figure 3) Higher pricing,
moderate energy costs, and the return of more “normalized” patterns of demand were factors, but
the industry deserves credit for how well it managed through the recession. Layoffs and plant
closures may have been painful, but they enabled many companies to emerge from the recession
stronger than when they entered it. With leaner staffing and the higher efficiency of retained
capacity, chemical firms had high levels of operating leverage, so that even modest upticks in
demand translated into bottom line profits. This was exactly where a company wanted to be in the
early phase of the recovery.
In the first half of 2010, chemical companies reported continued growth in revenues and earnings,
with revenues hitting an 18 month high in April before tapering off over the summer. In reporting
second quarter earnings, some firms warned that the second half might not be as robust as the first.
Specialty chemicals manufacturers in particular reported that rising raw material prices and
lingering weakness in the housing markets might constrain full year profits. Over the summer, there
were anecdotal reports that demand in many end markets was softening.
In fact, unit volume demand
had been softening since the
beginning of the year: U.S.
railcar loadings of chemicals
and the Federal Reserve’s
Chemical Production Index
show that the growth curve of
the industry began to flatten out
as early as January. The long
term trend in railcar loadings,
evident since the beginning of
2009, is steady and upward,
though the pace (slope) of the
uptrend is more gradual than
Trendline Trendline
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Figure 6: Chemical Production and Capacity Utilization January 2008 – January 2011
Source: Federal Reserve Board
62%
64%
66%
68%
70%
72%
74%
76%
78%
80%
80
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96
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100
102
Figure 5: US Railcar Loadings of Chemicals December 2009 – February 2011
Source: American Association of Railroads
-
5,000
10,000
15,000
20,000
25,000
30,000
35,000
we would prefer. (Figure 4) But if
you take a closer look at the
near term data, you see that
railcar loadings were basically
flat for all of 2010, crossing the
30,000 unit threshold only four
times. (Figure 5) Industrial
production and capacity
utilization of chemicals also
reached post-recession highs in
January 2010, before entering a
slump that lasted until August.
(Figure 6)
The leveling off in the chemical
industry predated a broader
slowdown in the economy that began sometime in the second quarter. Total U.S. industrial
production turned flat in July 2010 and remained so until November, but the Chemical Production
Index turned negative six months earlier and was growing again by August. (Figure 7)
After growing at a 3.7% rate in the first quarter of 2010, GDP grew at an annualized rate of only 1.7%
in second quarter, 2.6% in the third, and 2.8% in the fourth. Late in the third quarter, and through
the end of the year, the situation began to improve. Virtually all of the broad economic and
chemical industry indicators turned around, and seemed to suggest that the economy at last was
on a sustainable, albeit slow, growth path. Predictions of softer profits in the chemical industry in
the second half of the year never materialized. The S&P Chemical Index, after hitting a mid-year
low of 220.77 on July 6, rose 47.4% to 325.41 by March 3, 2011. (Figure 8)
In retrospect, the cause of the mid-year slump appears obvious. When Greece nearly defaulted
on its sovereign debt in the late spring of 2010, many believed it would be the first domino among
the heavily indebted “PIGS” (Portugal, Ireland, Greece and Spain) to go down. And with their debt
denominated in Euros, the whole
Eurozone was threatened, even
healthy countries like Germany.
Though the immediate crisis
passed by the fall, many investors
and economists began to have
second thoughts over the summer
about whether the global
financial crisis was really over.
We don’t discount the importance
of the sovereign debt issue, and
we have more to say on it below,
but we also believe there were
other factors domestically that
contributed to the slump in the
U.S. The first year or so of the
Capacity Utilization
(Right Axis)
Production
(Left Axis)
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Figure 8: S&P Chemical Index
January 2010 – March 2011
Source: Standard & Poors
200
220
240
260
280
300
320
340
Figure 7: Total Industrial & Chemical Production Indexes
January 2007 – January 2011
Source: Bureau of Labor Statistics
82.5
87.5
92.5
97.5
102.5
Total Industrial Production Chemical Production
recovery was a period when the
main drivers of growth were
inventory restocking and public
(i.e., government) initiatives:
stimulus spending and tax
incentives designed to direct
consumer spending to ailing
industries like autos and housing.
By nature, these things were
temporary, and as their effect
began to fade, a slowdown in
growth should have been
expected. The period we are in
now is one of transition, where
the challenge is to replace those
temporary stimuli with private
sector sources of growth that are more permanent and sustainable. That will be difficult, as will be
described below.
For the immediate future, there are two headwinds to growth: unemployment and weakness in
housing. Longer term, we will have to come to terms with excess levels of government debt, which,
unless we can bring it under control, is more likely than not to be the cause of the next recession,
two to five years out.
Regarding unemployment, it may appear to many that the difference between this recovery and
a lingering recession is so slight that it’s as much as matter of personal perspective as it is of
economic analysis. In other words, if you have a job, it’s a recovery; if you don’t, it’s a recession.
Although the idea of a “jobless recovery” may be a cliché, consider that at the beginning of the
recovery in March 2009, unemployment stood at 8.5%, and it only climbed from there, reaching a
peak of 10.2% in October 2009. Unemployment was above 9.5% for all but one month in 2010, and
Insert New Chart
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Figure 9: Unemployment Rates January 2008 – January 2011
Source: Bureau of Labor Statistics
0%
2%
4%
6%
8%
10%
12%
only recently, more than three years after the
recession began, does it finally appear to be
trending downward.3 (Figure 9) In March
2011, unemployment was 8.9%; by contrast,
in the wake of the 2001-2002 recession,
unemployment peaked at 6.3%. With so
many consumers overleveraged and
unemployed, the return of robust “pull
through” demand from discretionary
spending may be a long time coming.
The government doesn’t appear to have
many options to alleviate unemployment.
After the Republican gains in the mid-term
elections, another stimulus package is out of the question. Indeed, the focus for both parties now
has shifted to how much of the federal budget can be cut.
With fiscal stimulus out of the picture, monetary policy, the province of the Federal Reserve, has
been the government’s only option in attempting to jump start the economy and reduce
unemployment. Quantitative Easing, or “QE2” in its current incarnation, is the Fed’s policy of
purchasing treasury bonds using newly printed dollars. By increasing the money supply, the Fed
hopes to keep interest rates low, ward off the threat of deflation, and increase exports through a
weakened dollar. In the first round of Quantitative Easing, between December 2008 and March
2010, the Fed purchased $1.7 trillion in short-term Treasuries and mortgage-backed bonds, and is
credited with preventing a recurrence of the
Great Depression. In QE2, announced last August
and implemented at the beginning of November,
the Fed plans to purchase $600 billion in long-term
Treasuries.
Now that we’re over halfway through the
program, how has it worked? In our view, it’s
been like pushing on a string. Not only has it been
ineffective, but it may be doing more harm than
good. The Fed can have only an indirect
influence on long-term interest rates, and since the policy was implemented, intermediate and
long-term Treasury rates have actually been rising: the yield on the 10-year Treasury is currently
more than 100 basis points higher since October. But interest rates are not really the problem. Even
with rates at record lows, businesses are not going to borrow to fund new investments that would
create new private sector jobs as long as there is insufficient demand in the end markets to support
new capacity. “Insufficient demand” of course just means consumer spending is too low, which
itself is partially a function of the level of employment. It appears that we are stuck for the moment
in a negative feedback loop, for which unfortunately time may be the only cure, no matter how
well intentioned the Fed’s efforts have been.
3 After each of the previous two recessions, in early 1990s and early 2000s, employment gains lagged increases in GDP.
The recession was dated by the Business Cycle Dating Committee of the National Bureau of Economic Research, which
determined that the recession began in December 2007 and ended in June 2009.
Interest rates are not really the problem.
Even with rates at record lows,
businesses are not going to borrow to
fund new investments as long as there is
insufficient demand to support new
capacity.
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Figure 10: Dow Jones UBS Commodity Index
January 2010 – March 2011
Source: UBS Securities, LLC and Dow Jones & Company Inc.
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The real controversy relating to QE2, the one that has so many conservative economists and
politicians worried, is that it may unleash inflation, which once out of the box, may turn out to be
beyond the Fed’s capacity to control. To an extent, the Fed wants some level of inflation, if only to
head off the worse prospect of deflation. But with so much “slack” in wages and manufacturing
capacity, a rapid increase in the money supply is less likely to raise the overall price level than it is to
cause some degree of “asset inflation” or, to take a less charitable view of the situation, “asset
bubbles.”4 In a weakened economy with no capacity to absorb it, all that extra cash has to find a
home somewhere. And so it has, in the prices of U.S. farm land, precious metals, commodities, and
common stocks.5 (Figure 10) Everyone is familiar with the stock market’s almost unbroken ascent
since last fall, and everyone is equally aware that the prices of nearly any commodity you care to
name has also been rising. Some have even speculated that rising food prices may have played a
role in the recent uprisings in the Middle East. While there are some fundamentals that support
rising prices, large increases in asset prices over a short period suggest that excess liquidity could
also be at work, and that bubbles may be forming. As we all know from recent experience, asset
bubbles tend to end badly. The Fed’s focus on “core” inflation, which excludes food and energy
prices, may obscure a broader trend of growing inflationary pressures.
Government efforts to support the
recovery are also going to be
constrained by the continuing
difficulties in the housing market.
It’s not clear that home values
have hit bottom; the widely
watched Case-Schiller Index
suggests that the housing market is
already in a double-dip recession.
After declining throughout 2008-
2009, home prices began rising in
2010, but in the fourth quarter
began falling again, with home values declining 4.1% year-over-year.6 Declining home values not
only depress consumer spending, but also negatively impact employment growth. An
unemployed homeowner with an “underwater” mortgage is twice disadvantaged: without
substantial savings (which most do not have), not only are they unable to refinance, they can’t
move to take a job in an area with better employment opportunities. The imbalances in the
housing market took a long time to develop, and they are going to take a long time to unwind.
4 To be fair to Chairman Bernanke and the Federal Reserve, it’s likely that asset inflation is to some extent a secondary,
though unstated, goal of QE2. Their hope is that inflating the value of financial assets will create a “wealth effect” that
will stimulate consumer spending.
5 It’s ironic that in the wake of Great Recession, as commercial and residential real estate values are still well below 2006-
2007 levels, the prices of prime Midwestern U.S. farm land are appreciating at double digit rates, and according to the
President of the Kansas City Federal Reserve, may be entering bubble territory. See Statement of Thomas M. Hoenig,
President Federal Reserve Bank of Kansas City, Before the Senate Committee on Agriculture, Nutrition, and Forestry,
United States Senate, February 17, 2011.
6 National Home Prices Are Close to the 2009Q1 Trough According to the S&P/Case-Shiller Home Price Indices, Press
Release, S&P Indices, February 22, 2011.
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Longer term, economic growth is going to be constrained by the threat posed by large
government deficits and high levels of national debt in the United States and Europe. Just as the
Greek sovereign debt “crisis” of last spring faded from the headlines, the European Union had to
put together a bailout package for the former “Celtic Tiger” Ireland. The situation in Greece and
Ireland had the effect of exposing just how weak the finances of many of the EU countries really
were, as investors and the financial press turned their attention to the shaky condition of other EU
nations, first Portugal, then Spain, and then to a lesser extent, Belgium and Italy. The story is still
developing: in early March, Moody’s downgraded Spain’s debt, and the EU finance ministers met
to discuss additional rescue packages that may be needed by Portugal and Greece.7
This should not be a surprise. For over a year, the International Monetary Fund (IMF), in a reversal of
its traditional role of providing tough love to third-world countries that get into trouble, has warned
that the spillover from the financial crisis means that it’s the sovereign debt in developed nations
that now threatens the global economy.8 A loss of confidence in the ability of any one of the EU
governments or its leading banks to pay interest or refinance debt could lead to a downward
spiral. As borrowing costs increase in both the public and private sectors, economic activity would
decline. In turn, government revenues would fall, further eroding the creditworthiness of the
government’s debt, ultimately forcing it to cut spending on a massive scale, including much
beloved entitlements and social programs. Such a scenario is playing out in Ireland now: it
entered a recession in 2008, with its GDP declining 8% in 2009 and 1.6% in 2010. After accepting the
EU bailout package, the government instituted a harsh four-year austerity plan designed to cut $20
billion from its budget. Putting this in perspective, Ireland’s annual government revenues are less
than $70 billion and its GDP is less than $180 billion.9
What would happen if the crisis spreads to other European countries? Ireland and Portugal may be
only the 38th and 36th largest economies in the world, respectively, but Spain is ranked 9th, and Italy
is 7th.10 A sharp rise in oil prices or inflation resulting from on-going regime change in the Middle East
could be just the economic shock needed to trigger the next stage in Europe’s sovereign debt
crisis.
It’s probable that the European financial crisis affected the fall elections in the U.S., as voters looked
to Europe and increasingly saw the future of the American economy. “Tea Party” candidates and
mainstream Republicans made the national debt their issue, and were rewarded at the polls.
Going into 2011, the national conversation on our debt has acquired a new urgency. With federal
stimulus money now gone, newly elected governors are aggressively cutting expenses in states
where a balanced budget is mandated by the state constitution. As the confrontation between
the public unions and the Governor of Wisconsin made clear, the budgeting process has the
potential of forcing painful choices and further polarizing an already divided electorate.
The drama that occurred in Wisconsin in early 2011 may be a harbinger of a struggle that will soon
play out on the national stage. It’s clear that the federal government ultimately will be forced to
act, since its ability to continue rolling over our rapidly growing debt at historically low rates
inevitably will end. This reckoning may be approaching soon. According to the IMF, between 2011
and 2013, the U.S., along with a number of EU countries and Japan, will face a “wall” of maturing
7 Andreas Calas, Why Moody’s Downgraded Spain’s Debt Ratios, Christian Science Monitor, March 11, 2011.
8 International Monetary Fund, Global Financial Stability Report, April 2010, pp. 3-11.
9 CIA Factbook, 2011.
10 Ranked by nominal GDP for 2009. International Monetary Fund, World Economic Outlook Database, October 2010.
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Figure 11: Chemicals Price Producer Index vs. Price of Crude Oil January 2000 – January 2011
Source: Bureau of Labor Statistics
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$-
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$40
$60
$80
$100
$120
$140
$160 Price of Crude Oil Chemical PPI
Price of Crude Oil
(Left Axis)
Chemical PPI
(Right Axis)
debt that will need to be refinanced. Competition among nations to refinance this debt, as well as
competition resulting from the funding needs of emerging economies, could force up interest rates
and derail the global recovery. For years, investors and countries with excess reserves accepted
lower rates because inflation was low, but a tipping point may come when the risk of holding
sovereign debt outweighs its relatively meager total return potential. At that point, bond investors
are going to demand higher risk premiums, and rolling over national debt is going to become a
much more expensive proposition. In the United States, as in most countries, the choices will be
stark: cut spending, raise taxes, or both.
For chemical producers, there are two implications of a slower growth, and riskier, economy. First,
top and bottom line growth from existing operations will be restrained. The benefits from increased
operating efficiencies developed during the recession will cease to drive profit growth, and both
revenues and profits will begin to more closely follow the growth track of GDP. Additionally, without
significant growth in end market demand, companies that have large cash balances simply will not
be able to find good investment opportunities in which to deploy capital that would drive
incremental revenue growth. Instead, they are more likely to pursue acquisitions. As discussed in
the following article “The Rebound”, the deal environment strengthened in 2010 and looks very
strong in 2011.
Second, we believe public and private market valuations will have to readjust to reflect slower
earnings growth. The period of multiple expansion that typically follows a recession may be
coming to an end, but it’s not clear whether earnings multiples – Price/Earnings and Enterprise
Value/EBITDA ratios – have found a level that reflects the realities of the post-recession
environment. As the following article on public valuations of chemical companies shows, multiples
have come back and are at near pre-recession levels, mainly because valuations (the numerator
in valuation ratios) have increased faster than earnings (the denominator). Multiple expansion
should level off as earnings growth slows.
Managing risk in the supply chain, particularly for firms whose raw materials are derivatives of crude
oil, is another emerging issue for chemical firms. Oil, so deeply embedded in the economy, is
different from all other commodities in that it is not renewable (you can always plant a new crop of
wheat) and it is too often at the
center of global politics.
The chemical industry always has
been heavily dependent on oil,
either for energy, a source of raw
materials, or both. Though
chemical prices generally do not
exhibit the same volatility as
crude oil, the cost of chemical
production generally has tracked
changes in the prices of crude
oil, meaning that the chemical
industry is vulnerable to the same
geo-political considerations that
affect worldwide oil production.
(Figure 11) In 2008, a spike in the
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Chemicals Producer Price Index (PPI) accompanied the crude oil “bubble” that formed in the
spring and summer. When the bubble collapsed in the fall, chemical production costs also fell, but
then resumed a long-term uptrend, reaching a new record high in January 2011. From September
through December 2010, the price of crude increased 27%, from about $71.25 a barrel to over
$90.50 a barrel by the end of the year. To an extent, the increase was a function of the improving
economy, though many believe that the rising price of oil, along with the prices of other
commodities, was a sign of incipient inflation resulting from Fed’s loose monetary policy (QE2).
But the increase in the price of oil in the fall of 2010 turned out to be just a prelude. After the
governments of Tunisia and Egypt were brought down by popular uprisings, many believed that the
Middle East was about to undergo the experience of Eastern Europe after the fall of the Soviet
Union, as demands for democratic reforms spread to Bahrain, Yemen, Iran, Iraq and Saudi Arabia.
But the developments in Libya showed that peaceful transitions of power are not always a given.
At this writing, Libya is mired in a brutal civil war, and there’s a real possibility that it will eventually
end up more like Somalia than Egypt. Though Libya may account for only about 2% of world oil
production, the oil markets have priced in this risk, with the cost of oil shooting up from $92 per
barrel at the beginning of January to over $105 per barrel by March 7th, a 15% increase.
The economic “shock” of rising oil prices is already reflected in the rising costs of raw materials for
chemical manufacturers. Depending upon their end markets, and where their products lie on the
commodities/specialties continuum, chemical firms have varying capabilities to pass through price
changes in the cost of petrochemicals and other raw materials, though usually with a lag that can
range from weeks to months. During periods of rapidly escalating prices, producers usually can’t
raise prices fast enough to offset declining margins, and when the costs of raw materials fall, they
are reluctant to cut prices as they attempt to recapture lost margin.
All producers suffer from the increased price volatility that can accompany rapid change in the
geo-political environment. For public firms, quarter-to-quarter margin predictability is a key driver of
market capitalization. Smaller, generally private firms do not have this problem, but in some
respects they have it even tougher: without the advantages of scale, they lack pricing power with
customers and leverage with suppliers, and have more difficulty accessing alternate sources of
supply. Both public and private firms have to invest more in working capital just to be able to adjust
to price fluctuations.
Thus it appears that the industry is at an inflection point. We have emerged from the recession,
and the “rebound” phase of the recovery is probably coming to an end. Whatever is coming next
is not that clear, especially since so many risks to the global economy remain unresolved. What is
certain is that there will be spillover into the chemical industry from developments in the world at
large, and that some of these developments will be unforeseen and difficult to manage. But the
industry proved in 2008 and 2009 that it is capable of adapting to even the most unpredictable
environments, and it’s probably inevitable that within a year or so, the markets will have settled and
the industry will have a better idea of where we’re headed.
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THE REBOUND CHEMICAL M&A 2010 - 2011 The deep wounds left from the Great Recession are starting to heal and recovery is underway -
credit markets are thawing and cash-rich chemical firms are looking for ways to accelerate
growth. In 2010, chemical transactions totaled $36 billion, 44% higher than the aggregate total
deal volume of $25 billion for all of 2009.1 The acceleration in M&A activity in 2010 is even more
remarkable given that the 2009 number was inflated by the value of one transaction: Dow
Chemical’s $15.5 billion purchase of Rohm & Haas which accounted for about 62% of total deal
value.
In the first half of 2010, strategic buyers clearly dominated the M&A market while financial
buyers, hampered by limited access to financing, accounted for only 6% of total transaction
value. However, as the credit markets improved, financial buyers began to return to the markets
in force, with one noteworthy example being Bain Capital’s $1.6 billion acquisition of Dow’s
Styron business in March 2010. With lots of cash to be invested, financial investors have
considerable pent-up demand, and with financing becoming easier to obtain, private equity
groups are once again hunting for quality assets.2
While there were a
handful of large
strategic deals that
closed in 2010 or have
been announced in
2011, these types of
deals seem to be more
the exception than the
rule. Though the
chemical industry
seems to be
rebounding globally,
there are a number of
factors that threaten
the sustainability and speed of the recovery. The housing and automotive markets, key markets
for chemicals, are still well below pre-crisis levels. Additionally, the continuing sovereign debt
crisis in Europe, political unrest in the Middle East, the drying up of government stimulus dollars,
persistent high levels of unemployment, aggressive government regulatory pressures and
concerns related to rising feedstock prices all pose a threat to recovery and make it less likely
that chemical strategics will want to “bet big” on large deals in the near future.
There are strong strategic rationales for the large deals that have closed or are pending. Corn
Products’ $1.3 billion acquisition of National Starch from Akzo Nobel filled out Corn Products’
ingredients portfolio and is expected to be accretive to earnings by the end of 2011. BASF’s $4.0
1 Estimated by Young & Partners, New York, counting transactions with a value greater than $25 million. 2 The Blackstone Group estimates that private equity groups have over $500 billion to invest, higher than the $463 billion
available in 2007 at the previous peak in private equity cycle. See Vincent Valk, “Banker: “Golden Years” Coming for
Private Equity”, Chemical Week, January 20, 2011.
Figure 1: Large Strategic Chemical Deals 2010 - 2011
Buyer Target Date Value
Berkshire Hathaway Lubrizol Pending $9.7 billion
DuPont Danisco Pending $6.3 billion
Clariant Süd-Chemie (controlling
stake) Pending $2.8 billion
DSM Martek Pending $1.1 billion
CF Industries Terra Industries April 2010 $4.7 billion
BASF Cognis December
2010 $4.0 billion
Mitsubishi Chemical Mitsubishi Rayon March 2010 $2.5 billion
Bain Capital Dow’s Styron business June 2010 $1.6 billion
Corn Products Akzo Nobel’s National
Starch October 2010 $1.3 billion
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billion (€3.1 billion) purchase of Cognis will provide BASF with a stronger position in the more
economically resilient personal care markets. Finally, DuPont’s pending acquisition of Danisco
will advance Dupont’s position in the health and nutrition markets.
What may turn out to be the biggest deal of 2011 is neither strategic nor private equity. In mid-
March, Berkshire Hathaway announced that it will acquire Lubrizol for $9.7 billion in an all cash
deal. At $135/share, the price represented a 28% premium over the stock price the day prior to
the announcement. Though Berkshire does own a number of chemical assets, including
Benjamin Moore Paints, there are no real synergies between Lubrizol and other Berkshire
companies. Instead, Berkshire’s chairman and CEO Warren Buffet - as in most of his acquisitions -
just saw an old fashioned value play in Lubrizol: “Lubrizol is exactly the sort of company with
which we love to partner - the global leader in several market applications run by a talented
CEO, James Hambrick," said Buffett.3
The chemical M&A “sweet-spot” in 2011 is likely to be small- to mid-size “bolt-on” deals with
values less than $500 million. Bolt-on acquisitions, where a target company has a particularly
strong strategic fit and could be easily integrated into the acquiring company’s operations,
allow companies to upgrade technology, expand their market capabilities, and/or deepen their
product portfolios. Additionally, with continuing uncertainty over the direction of the global
economy, bolt-on acquisitions represent a clear, low-risk approach to growth. That this
approach would be the course of choice for strategics emerging from the recession was made
clear by a number of industry CEOs in conference calls during 2010.4
An excellent example of a recent bolt-on is Eastman Chemicals’ purchase of Genovique
Specialties in May 2010. The acquisition strengthened Eastman’s existing plasticizers and
intermediates product lines, and enhanced its diversification into emerging geographic regions.
Solutia completed a number of bolt-on acquisitions in 2010 including its $304 million acquisition
of Etimex Solar (Germany) in June and a $73 million purchase of Novomatrix (Singapore) in May.
Both acquisitions extended Solutia's reach in performance materials for the renewable energy
(Etimex Solar) and aftermarket window films (Novomatrix) markets. And it appears Solutia’s bolt-
on acquisition strategy isn’t set to stop anytime soon. In an article published in September 2010,
CEO Jeffry Quinn was quoted as saying “We’re looking for highly synergistic bolt-on acquisitions
much like Etimex Solar and Novomatrix.”5
3 Lubrizol Press Release, March 14, 2011. See also: “Why Warren Buffett Just Spent $10 Billion”, The Wall Street Journal.
March 18, 2011. 4 In PPG’s first quarter 2010 earnings call, CEO Charles Bunch stated “We intend to further deploy our strong cash position
focused on bolt- on acquisitions and share repurchases to fuel our earnings growth.…” Similarly, in Lubrizol’s first quarter
2010 earnings call, CEO James Hambrick, said “…our desire is to make several high-quality bolt-on acquisitions in the
$100 million to $500 million range.” Lastly, in Dow Chemical’s fourth quarter 2010 earnings call, CEO Andrew Liveris stated
“the bolt-on M&A….there will be some of that as we go through. But these are high margin bolt-ons, ones where we can
maybe buy small regionally and scale up globally so we can get synergies immediately.” 5 ICIS, September 2010, Solutia CEO Interview
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Figure 2: 2010 - 2011 “Bolt-Ons”
Buyer Target Date Comments
PPG Industries Equa-Chlor Pending PPG will gain a strategic foothold in the western US
chlor-alkali markets
PPG Industries Bariun Chemical Pending Strengthens PPG’s leadership position in the Chinese
and Asian packaging coatings industry
Valspar Isocoat Tintas e Vernizes Ltda. February
2011
Strengthens Valspar’s presence in Latin America and
broadens its range of technologies for general
industrial applications
Lubrizol Nalco’s Performance Products
Business
January
2011
Expands Lubrizol's Noveon® personal care and
household care product portfolio
ITW Celeste Industries January
2011
Broadens ITW’s line of transportation chemicals
Eastman Chemical Genovique Specialties May
2010
Adds volume and reach for Eastman’s plasticizers
business
Solutia Etimex Solar June
2010
Positions Solutia as a worldwide one-stop shop for
encapsulants used in solar energy applications
Solutia Novamatrix May
2010
Enhances Solutia’s performance materials for the
windows aftermarket
Arkema Dow’s UCAR Emulsion Systems January
2010
Strengthens Arkema’s acrylics product line and
becomes the core of a new emulsions business unit
Braskem Sunoco’s Polypropylene Business January
2010
Builds on the consolidation of petrochemical assets to
make Braskem a leading North and South American
producer of petrochemicals
Valspar Wattyl’s Australian Deco June
2010
Strengthens Valspar’s position in Asia Pacific region
and expands its brand portfolio
Sherwin-Williams Arch Industrial Wood Coatings March
2010
Builds on Sherwin Williams’s position as a leading
global supplier of wood coatings
Altana Aquaprint April
2010
Adds to Altana’s capabilities in coatings and
varnishes for printing applications
Akzo Nobel Lindgens Metal Decorating
Coatings and Inks
July
2010
Consolidates Akzo’s position as a leading global
supplier of packaging coatings
Stepan Alfa Systems July
2010
Increases Stepan’s polyester polyol capacity in
Europe
Landec Warburg Pincus’ Lifecore April
2010
Expands Landec’s capabilities in advanced materials
to include biomaterials
Potential “bolt-on” companies coming to market are not expected to be in short supply. Over
the past few years, many large chemical firms have undertaken restructuring efforts that have
resulted in a number of quality businesses coming to market. Dow Chemical’s sale of its UCAR
Emulsions Systems business to Arkema in January 2010 is a perfect example. The sale supported
Dow’s strategy of focusing more on downstream specialty products, as well as helped pay down
the debt it took on as a result of the Rohm & Haas transaction. For Arkema, the business fits
easily into its existing acrylics business, and formed the core of a new Emulsion Systems unit
focused on the coatings, adhesives and construction products markets.
Additional deal flow is coming from private equity, as many private equity funds postponed the
divestiture of portfolio companies during the recession and are likely to put these businesses on
the market in the near-term. Many private companies also were brought to market in 2010 by
shareholders who anticipated changes in the tax code relating to capital gains. This was
especially significant in the second half of 2010, and we now expect this to be a driver of M&A
activity in 2011-2012 as well, since Congress and the President reached an agreement in
December 2010 to extend the Bush tax cuts for two years.
In 2011, we expect to see a continuing high level of M&A activity. Organic growth for strategics
is going to be difficult due to slow pace of the recovery. In the absence of home grown
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investment opportunities, the logical choice will be to grow through acquisitions, especially for
companies with strong earnings and healthy balance sheets. Additionally, large chemical
companies will continue to divest non-core assets. Many of these firms would have preferred to
shed these assets during the downturn, but were not able to sell due to the shortage of buyers
and lack of liquidity. With improved market conditions and rising valuations, strategics will likely
revisit putting these non-core assets on the market. Private equity interest in chemical
transactions is also expected to be high as financial buyers seek to place capital.
With many high-quality companies coming to market now, and with banks again willing to lend
to profitable and well-managed companies, competition in the market should be strong for the
remainder of the year. It will be a good environment for sellers, who can expect to get pricing
and terms very close to what they could have received prior to the recession.
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2010 - 2011 CHEMICAL INDUSTRY SELECTED TRANSACTIONS
DATE ACQUIRER TARGET
Pending Berkshire Hathaway Lubrizol
Pending PPG Industries Equa-Chlor
Pending Clariant Süd-Chemie (controlling stake)
Pending DuPont Danisco
Pending China National Bluestar Orkla’s Elkmen business (Oslo)
Pending Evonik Boehringer Ingelheim’s RESOMER® brand polymers for
medical and pharmaceutical applications
Pending AXA Private Equity (Paris) Novacap (majority stake)
Pending Mexichem Rockwood Holdings’ AlphaGary’s plastic
compounding business
Pending Perstorp Ashland’s pentaerythritol business
Pending Novozymes Merck KGaA’s Crop BioScience subsidiary
Pending DSM Martek Biosciences
Pending TSRC (Taipei) Dexco Polymers (Dow Chemical/ExxonMobil 50/50 JV)
Pending Olin PolyOne’s 50% interest in the SunBelt Chlor-Alkali
partnership
Pending
H.I.G Capital
Cytec’s Building Block Chemicals business
Pending
PPG Industries
Bairun Chemical
Pending
Univar
Quaron Group
Pending Mexichem Ineos’ Fluor unit
Feb-11 DAK Americas Eastman’s PET business
Feb-11 Valspar Isocoat Tintas e Vernizes Ltda., (São Paulo, Brazil)
Jan-11 Lubrizol Nalco’s performance products business
Jan-11 Hallstar Biochemica International
Jan-11 Lanxess Darmex (Buenos Aires)
Jan-11 Pinova Holdings LyondellBasell’s flavors and fragrances business
Jan-11 Quaker Summit Lubricants
Jan-11 PolyOne Uniplen Industria de Polimeros
Jan-11 BASF SHELL’S Styrene Catalyst Business
Jan-11 K+S Potash One (majority stake)
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DATE ACQUIRER TARGET
Jan-11 ITW Celeste Industries
Jan-11 Blackstone Capital Partners Polymer Group, Inc.
Dec-10 Univar BCS
Dec-10 TPG Capital Ashland Distribution
Dec-10 BASF Cognis
Dec-10 HEXPOL Excel Polymers
Nov-10
Caltius Equity Partners
National Industrial Coatings, Inc. (Nicoat)
Nov-10 Rhodia Feixiang Chemicals
Nov-10 Arsenal Capital Partners Royal Adhesives and Sealants (Quad-C)
Nov-10
Clayton, Dubilier & Rice
Univar (CVC Capital Partners)
Nov-10 American Securities Arizona Chemical (Rhone Capital)
Oct-10 Univar Basic Chemical Solutions
Sep-10 Dayton Superior Unitex Chemicals
Sep-10 ITW Panreac (3i)
Sep-10
Akzo Nobel
Changzhou Prime Automotive Paint
Sep-10
Sherwin-Williams
Becker Acroma
Sep-10
New Mountain Capital
Mallinckrodt Baker
Sep-10
IGM Resins
Cognis’ UV Acrylates business
Jul-10
Stepan
Alfa Systems
Jul-10
Akzo Nobel
Lindgens Metal Decorating Coatings and Inks
Jul-10
Brenntag
EAC Industrial Ingredients
Jul-10
Vantage Specialty
Chemicals Lipo Chemicals
Jun-10
Valspar
Wattyl’s Australian Deco
Jun-10
Bain Capital
Dow Chemical’s Styron
Jun-10
Flint Group
Torda
Jun-10
Harren Equity Partners
Marianna Industries
Jun-10
Solutia
Entimex Solar
Jun-10 OCI DSM’s fertilizer and melamine businesses
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DATE ACQUIRER TARGET
Jun-10
RPM
Hummer Voll Industrial
May-10
Solutia
Novomatrix
May-10
Surfin Chemicals/Aterian
Investment Partners Chemtura’s PVC additives business
May-10
A. Schulman
ICO
May-10
KLK Emmerich
Croda’s German Oleochemicals business
May-10
Eastman Chemical
Genovique Specialties
Apr-10
Nalco
Res-Kem
Apr-10
Nalco
General Water Services
Apr-10
Landec
Warburg Pincus’ Lifecore
Apr-10
Jarden Corp.
Total’s Mapa Spontex business
Apr-10
Braskem
Quattor
Apr-10
Evonik
Arkema’s methacrylate esters business
Apr-10 Altana Aquaprint
Mar-10
Mitsubishi Chemical
Mitsubishi Rayon
Mar-10
Sherwin-Williams
Arch Chemical’s Industrial Wood Coatings
Mar-10
KMG Chemicals
General Chemical’s electronic chemicals business
Mar-10
RPM
Chemtec Chemicals
Mar-10
A. Schulman
McCann Color
Mar -10
H.B. Fuller
Revertex Finewaters
Mar-10
Sika
Henkel Japan’s construction sealant business
Mar-10
3M
MTI PolyFab
Mar-10
Aceto
Andrews Paper & Chemical
Mar-10
Evonik
H.C. Starck’s catalyst unit
Feb-10 OM Group EaglePicher Technologies
Feb-10
Kiri Dyes and Chemicals
Dystar Textilfarben
Jan-10 Braskem Sunoco Chemicals’ polypropylene business
Jan-10
Zep
Amrep
Jan-10
Arkema
Dow Chemical’s UCAR Emulsions Systems business
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Figure 1: Grace Matthews Chemical Index: Mean Values
January 2011
Micro Cap Index (in millions)
Small Cap Index (in millions)
Mid Cap Index (in millions)
Large Cap Index (in millions)
Full Index (in millions)
Sales Revenue
EBITDA
Enterprise Value
$752
$55
$509
$2,355
$272
$2,098
$5,479
$771
$6,488
$36,874
$6,397
$57,058
$11,529
$1,905
$16,949
EV/Revenues
EV/EBITDA
1.1
9.2
0.9
7.6
1.4
8.8
1.7
9.3
1.2
8.4
Aceto Corp.
Brush Engineered Materials
Ceradyne
Darling International
Lifeway Foods
Quaker Chemical
Spartech
A.Schulman
Zep, Inc.
Arch Chemicals
Corn Products International
Cytec Industries
H.B. Fuller
Ferro
Georgia Gulf
OM Group
PolyOne Corp.
RPM International
Sensient Technologies
Ashland Chemicals
Avery Dennison Corp
Church and Dwight
Eastman
FMC Corp
Huntsman
International Flavors &
Fragrances
Lubrizol
Sherwin Williams
Valspar
Archer Daniels Midland
Air Products
BASF
Clorox Co.
DuPont De Nemours
Dow Chemical
Ecolab
3M Company
Proctor and Gamble
PPG Industries
Source: Grace Matthews, Inc.
THE GRACE MATTHEWS INDEX VALUATIONS OF PUBLICLY TRADED CHEMICAL FIRMS
The Grace Matthews’ Chemical Valuation Index is comprised of 40 publicly traded chemical
companies, spanning multiple markets, geographies, and company sizes. The Index aggregates
financial data from quarterly reports, and tracks valuation trends across different market
capitalization ranges and industry sectors. At any point in time, the Index calculates average
valuations for public chemical companies, highlighting key differences between the averages
and specific companies or industry groups.
The Index tracks historical trends in revenue and earnings multiples, as well as other profitability
and solvency ratios. Studying the Index in the context of historical data tracking the S&P 500,
private equity fund flows, and economic fundamentals reveals the relationship between the
chemical industry and the overall market environment.
Historically, the chemical industry is value tilted, with lower price/earnings and price/book ratios
than growth industries such as technology, healthcare, and media. Between 2005 and 2011,
average valuation multiples for the Index have been 1.1X revenues and 7.8X EBITDA.
2007 – 2010: FROM PEAK TO TROUGH AND BACK
As is the case with other suppliers of basic materials to the economy, chemical companies’
growth and valuations tend to move in parallel with domestic GDP growth. It’s now well
understood that the stock market highs attained in the fall of 2007 were unsupported by the
underlying environment of financial excess, deteriorating corporate profits, and softening real
estate values. Chemical market valuations began to decline in the fall of 2007 as the recession
began, even as industry earnings continued to expand for another year.6 (Figure 2) A typical
experience for the time is represented by Sherwin-Williams, a diversified coatings manufacturer.
6 The National Bureau of Economic Research (NBER), the organization responsible for dating recessions and expansions,
has determined that the recession began in September 2007 and ended in June 2009.
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Figure 3: U.S. Chemical Industry Employment
January 2000 – January 2011
Source: Grace Matthews, Inc.
750
800
850
900
950
1000
(in
th
ou
san
ds)
Figure 2: Enterprise Value and EBITDA
January 2005 – January 2011
Source: Grace Matthews, Inc.
0
500
1000
1500
2000
2500
3000
3500
4000
4500
5000
0
500
1000
1500
2000
2500
En
terp
rise V
alu
e
EB
ITD
A
EBITDA Enterprise Value
Sherwin-Williams’ net income
rose 6.8% in 2008, yet its stock
price declined nearly 13%
during the same period.
As the recession deepened,
chemical companies faced an
environment of vastly increased
capacity and stagnating
demand. By early 2009,
capacity utilization for the
chemical industry had fallen to
all-time lows, as many
companies were forced to shut
manufacturing facilities or scale
back production. As is common
during recessions, large
diversified chemical companies
survived by going lean, raising cash, and laying off workers. The recession had the effect of
accelerating a long-standing trend of declining employment in the U.S. chemical industry, due
to automation, increasing labor productivity, and offshoring. (Figure 3)
Small chemical companies’ valuations got hit much harder than their large-cap counterparts in
2008 and 2009. Compared with large multinationals, smaller firms entered the recession with less
ability to squeeze out fixed costs, higher default risks, and capital structure constraints. Chemical
companies with market capitalizations below $500 million lost on average over 69% of their total
market capitalization from peak to trough, compared to 49% for companies larger than $10
billion. Enterprise Value/EBITDA ratios for micro cap companies fell below 4.5X in early 2009
compared to 7.5X for large cap
chemical conglomerates.7
A classic “V” shaped economic
recovery, beginning in the third quarter
of 2009, is ostensibly shown by the
performance of industry multiples in the
wake of the Great Recession. From
April 2009 to January 2011, Enterprise
Value/EBITDA ratios increased from 6.7X
to 9.3X for large caps. The recovery for
micro caps was more dramatic: over
the same period, Enterprise
Value/EBITDA ratios more than
doubled, from 4.0X to 9.2X. (Figure 4)
7 “Enterprise Value”, or “EV”, is the sum of all invested capital in a company, including both the value of equity (market
capitalization) and funded debt. The EV/EBITDA ratio is similar to the classic P/E ratio, but it eliminates the effect that a
company’s capital structure will have on the ratio, therefore allowing direct comparisons between different companies.
When M&A professionals speak of “multiples”, they are usually referring to EV/EBITDA multiples.
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Figure 5: Selected Chemical Company Valuations
February 2010 vs. February 2011
February 2010 February 2011
Net Debt /
EBITDA
Enterprise
Values /
Revenues (ttm)
Enterprise
Value /
EBITDA (ttm)
Net Debt /
EBITDA
Enterprise
Value/
Revenues (ttm)
Enterprise
Value/EBITDA
(ttm)
3M 0.4 2.6 9.8 0.2 2.4 9.1
Akzo Nobel N.V. 1.0 0.9 7.2 1.3 0.9 7.4
Air Products & Chemicals, Inc. 2.0 2.6 10.5 1.6 2.5 9.6
Albemarle Corporation 1.6 1.2 12.8 0.6 2.3 10.3
Ashland Inc. 1.6 0.5 5.6 1.0 0.6 7.1
BASF Corporation 1.5 0.9 5.9 1.0 1.1 5.4
The Dow Chemical Company 5.2 1.2 16.1 3.1 1.2 9.4
Cytec Industries, Inc. 2.3 0.9 9.7 0.8 0.9 8.4
DuPont 2.3 1.4 10.8 1.5 1.8 9.9
Eastman Chemical Company 1.3 1.0 7.9 0.8 1.2 6.5
H.B. Fuller Co. 0.7 0.9 7.6 0.8 0.9 8.4
The Lubrizol Corporation 0.6 1.4 7.0 0.4 1.6 7.2
Olin Corporation NA* 0.8 5.2 0.2 1.0 8.4
PPG Industries, Inc. 1.9 1.0 9.1 1.2 1.2 8.7
RPM International 1.4 0.9 7.7 1.5 1.1 9.0
The Sherwin-Williams Company 0.7 1.1 8.8 1.1 1.3 10.8
Sensient Technologies Corp. 2.2 1.5 8.8 1.6 1.5 9.5
The Valspar Corporation 1.7 1.2 8.4 1.4 1.4 9.2
W.R. Grace & Co. 0.4 0.6 5.9 NA* 0.9 6.3
Median 1.6 1.0 8.4 1.1 1.2 8.7
Mean 1.6 1.2 8.7 1.1 1.4 8.5
*Cash balance exceeds debt
Figure 4: Enterprise Value / EBITDA By Size
January 2005 – January 2011
Source: Grace Matthews, Inc.
3.5
4.5
5.5
6.5
7.5
8.5
9.5
Large Cap Mid Cap Small Cap Micro Cap
2011 VALUATION AND GROWTH PROSPECTS
Recovering from a mid-year downturn in
2010, equity markets now seem to be
pricing in a robust future profit cycle.
Aggregate earnings have started to
eclipse the all-time highs of mid-2008, and
corporate profits are steadily increasing as
companies benefit from the operating
leverage gained through cost cutting
during the recession. Forecasts for the first
quarter of 2011 appear to anticipate
modest strength and measured
improvement across the chemical value
chain.
In the Grace Matthews Spring 2010 Chemical Whitepaper “Chemicals at the Crossroads” we
discussed the importance of balance sheet strength for chemical companies, observing that
relative to acquisitions, “those in the best position to move forward are the well-capitalized
strategic buyers.” We believe that this is even more relevant now as cost cutting and a rebound
in sales have resulted in companies having unprecedented levels of cash on their books. Net
Debt to EBITDA (Funded debt less cash divided by EBITDA) has decreased 31% on average since
February 2010. (Figure 5) It is our belief that M&A will continue to be strong in 2011 as public
companies look to acquisitions as a way to deploy capital built up over the past year.
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As the unrest in the Middle East and the Japanese Tsunami have shown, 2011 will not be without
its setbacks, and the long-term effects of such events on the global recovery and public
company valuations are as yet unknown. Disregarding this risk and looking purely at the
financial issues, it appears that in the near term a weak U.S. dollar will help chemical companies
that export goods or earn revenues abroad, and that chemical valuations will be supported by
improving economic fundamentals. This conclusion appears to be supported by the modest
improvement in valuation multiples over the past six months.
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GRACE MATTHEWS SPECIALTY CHEMICAL TEAM: STRONG COMMITMENT TO CHEMICALS
John Beagle
Managing Director &
Chemical Team Leader
Ben Scharff
Director
Kevin Yttre
Vice President
Andrew Hinz
Vice President
Aaron Pollock
Analyst
Andrea Wolf
Associate
Trent Myers
Vice President
Thomas Osborne
Senior Executive
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SELECT GRACE MATTHEWS CHEMICAL TRANSACTIONS
Grace Matthews, Inc. advised Landec Corporation on this transaction
has acquired
from
Grace Matthews, Inc. advised
Brockway Moran on this transaction
has sold its portfolio company
to
has acquired the stock of
Beckers Industrial
Coatings
Grace Matthews, Inc. advised Specialty Coatings Company on this transaction
Grace Matthews, Inc. advised Columbia Paint & Coatings on this transaction
merged with
has acquired
Grace Matthews, Inc. advised Akzo Nobel nv on this transaction
has been recapitalized by
Grace Matthews, Inc. advised ColorMatrix Corporation on this
transaction
Grace Matthews, Inc. advised LORD Corporation on this transaction
has sold its Resilient Floor Coatings Business to
Grace Matthews, Inc. advised Northwest Coatings, LLC on this transaction
has acquired
has acquired
Grace Matthews, Inc. advised NorthStar Chemicals, Inc. on this
transaction
has been acquired by
Grace Matthews, Inc. advised Raabe Corporation on this transaction
Corporation
has acquired
Grace Matthews, Inc. advised Minco on this transaction
has sold the assets of Lubrizol Performance
Systems to
Grace Matthews, Inc. advised Lubrizol Corporation on this transaction
to
has sold the stock of
Grace Matthews, Inc. advised the shareholders of CERAC, Inc. on
this transaction
Facilitator Capital
Fund
has been acquired by
Grace Matthews, Inc. advised GSI General Materials, LLC on this
transaction
a subsidiary of
has licensed exclusive fields of Intelimer technology from
Grace Matthews, Inc. advised Landec Corporation on this transaction
has sold its U.S. fine chemicals subsidiary, Borregaard Synthesis,
Inc., to
Grace Matthews, Inc. advised Borregaard on this transaction
has acquired the assets of
Grace Matthews, Inc. advised Pacific Epoxy Polymers, Inc. on this
transaction
Grace Matthews, Inc. advised Landec Corporation on this transaction
has sold its specialty chemical subsidiary
to
has acquired
Grace Matthews, Inc. advised Akzo Nobel nv on this transaction
The Flood
Company
has acquired certain assets of the Foam Latex operations, located in
Calhoun, GA, of
Grace Matthews, Inc. advised Bostik Findley, Inc. on this transaction
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219 North Milwaukee Street, 7th Floor
Milwaukee, WI 53202
414.278.1120
www.gracematthews.com