The chemical industry is one of the most international sectors with activity dominated by cross border transactions. Chinese and other Asian firms have been particularly busy expanding their global footprint and taking advantage of the quality assets for sale.

Worldwide, geopolitical tensions and slowing global economic growth took its toll in terms of the number of deals, according to Mergermarket data for fiscal year (FY) 2018. However, deal volumes jumped 11.5% to $3.53 trillion in 2018 compared to the prior year while more specifically the Asia-Pacific (excl. Japan) M&A ­region recorded 4,036 deals totaling $717.4 billion, a 2.6% hike over 2017.
Overall, the industrials and chem­icals sector was the most attractive sector in 2018 by both value and volume. The final tally was 318 deals priced at $68 billion, compared to $82 billion across 321 deals in 2017.

China continued to be an active participant although the on­going trade wars with the US caused a dramatic shift in deal flow. Europe became the preferred destination with Chinese acquisitions in the region surging 81.7% to $60.4 billion from $33.2 billion in 2017. Deal­making slowed down in the fourth quarter, but the first nine months saw 23 trans­actions of which, for example, ten in the consumer or a respective seven in the business services and energy, mining and utilities sectors. By contrast, transactions in the US plummeted 94.6% to $3 billion last year from a record $55.3 billion in 2016, according to Mergermarket ­figures.

“Chinese and other Asian firms
have been particularly busy expanding
their global footprint and taking advantage
of the quality assets for sale.”

The motives behind European transactions are the same as those driving other global purchases — to close the gap through acquiring technological prowess as well as expertise, proprietary formulations and products. One example is the roughly €200 million sale of European engineering plastics specialist Elix Polymers by Sun European Partners to Beijing-based Sinochem. The deal supports the ABS Compound producer’s strategy to expand its activities in Asia, a region in which it is currently underrepresented. At the same time, it will boost Sinochem’s presence in the plastics industry ­beyond chemicals trading and fertilizer production.

Growing Investment Interest in Sustainable Industries

It has been well documented that the Chinese economy is slowing to 6% growth from an originally forecasted 6.5%, but growth is still relatively robust compared to the low single growth figures of many developed countries. Chinese companies will continue to look for opportunities in traditional chemical segments, but they are also interested in buying organizations involved in pollution, water and waste treatment solutions as well as green and sustainable chemicals and plastics.

This is being driven by the government’s new environmentally-friendly laws under the 12th Five-Year Plan which aims to clamp down on unsustainable industries and incentivize clean and green energy businesses.

Chinese Government Influence

“While the flow of deals
has mainly been from China to the West,
the tide has not been just one way.”

While the flow of deals has mainly been from China to the West, the tide has not been just one way: Global conglomerates are divesting Chinese operations as well. As always, high quality assets are constantly in demand, such as the Hovione/Imax deal. But tighter government regulations have increased costs for companies and spurred divestment discussions.

The Chinese government has clearly stated it intends to standardize chemical parks along the lines of global industry best practice. Currently, only about half of the chem­ical production plants in China are in dedicated chemical parks, but this proportion is expected to increase drastically by 2020, with some provinces having set targets of 90% or more. Western companies, especially those who do not obtain a permit to increase capacity, are increasingly exploring all options for their assets instead of moving to one of the new parks.

The domestic industry is also set for a further bout of consolidations. Last year already saw Chinese chem­ical product manufacturers Yantai Wanhua and Wanhua Chemical join­ing forces in a $12.7 billion tie-up, but anticipation is running high for the merger between Sinochem and its rival Chemchina, which completed China’s largest outbound deal a year ago with the $44 billion takeover of Swiss agribusiness Syngenta, a deal in which Alantra was involved. The transaction, which would produce an oil-to-chemicals giant with more than $100 billion in assets, has been in the works for at least two years and would eclipse Germany’s BASF, the world’s largest maker of industrial chemicals, by sales.

If completed as anticipated, the deal is expected to significantly change the landscape of China’s chem­icals industry. It is likely to trigger a wave of restructuring resulting in new strategic plans and the hiving off of subsidiaries. Specialists and ­niche companies would be particularly attractive not only due to their sharper competitive edge and technological expertise but also lower valuations on the back of a weaker stock market. Medium-sized companies in the US and Europe such as the German Mittelstand would be especially interested in them because many missed out on getting a foothold in the Chinese market due to increasing prices during the first wave of M&A activity.