Acquisition Targets in the Chemical Industry
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Recently, Citigroup came up with a 3C theme to play the chemical sector in 2013. 3C stand for Commodities, Construction and Consolidation. In this article, I will only focus on the third C, i.e. consolidation. Consolidation accelerated in chemicals during 2012 due to:
1) Cheap financing which made many deals accretive and attractive;
2) Opportunities to cut costs in a slow growth environment; and
3) Strong balance sheets that enabled companies like PPG Industries and Eastman Chemicals to transform their portfolios.
Considering this transformation leads us to the question: Who are the potential acquisition candidates in the chemical sector?
The top four candidates turn out to be:
1) Celanese Corporation (NYSE: CE)
2) Cytec Industries (NYSE: CYT)
3) The Mosaic Company (NYSE: MOS)
4) The Valspar Corp. (NYSE: VAL)
Celanese – A Chinese company could be an acquirer given Celanese’s large assets in China and its emerging coal-to-ethanol plants in China. A Middle Eastern company could also be interested in the company given its C-1 chemistry and its specialty plastics division, an area that the Middle East is targeting for growth. However, I see less likelihood in the near term, given near-term weakness in China and some delay in its signing of ethanol contracts there.
Cytec Industries – I think the most likely strategic buyers are either:
1) An aerospace end-market focused company, or
2) A large chemical or aerospace company looking for carbon fiber exposure, especially now that Cytec’s coatings business is in the process of being divested.
The potential use of carbon fiber in automotive end-markets remains a lucrative opportunity for a buyer. The company is currently trading at a forward multiple of 15x. The company is expected to announce its last quarter’s earnings on Jan 31, after market close. Investors will look out for any discussion on the acquisition topic in the conference call.
Mosaic – Large global mining companies continue to investigate developing potash resources and Mosaic is the largest global producer who could be acquired after restrictions related to the Cargill transaction begin to unwind in May 2013. That said, fluctuating iron ore prices have delayed capital spending for miners, including for potash mines.
Valspar Co. – Given the ongoing consolidation of the global coatings industry, Valspar seems to be an attractive target for other large coating companies. However, both PPG Industries and Sherwin-Williams are less likely buyers now – in the case of PPG, both companies supply Lowe's creating negative synergies and PPG recently purchased Akzo’s North American business, and in the case of Sherwin-Williams, the company is focused on its recent purchase of Comex.
The other side of the picture
The Quest to Divest – Faced with slow economic growth, chemical companies have also looked to unlock value by divesting non-core assets, including PPG's divestiture of its chlor-alkali business to Georgia Gulf, DuPont selling its coatings business to Carlyle, and Cytec selling its coatings business to Advent International. Portfolio restructuring should continue in 2013. Dow Chemicals recently noted plans to divest up to $1 billion worth of low margin businesses over the next 12-24 months. Other companies could follow suit as well. Some businesses that I think are divestiture candidates include: Ecolab (paper), PPG (glass), Celanese (Nutrinova), and Eastman Chemicals (photovoltaics).
Therefore, the market can easily judge that the chemical industry is up for some serious ‘make and break’ in 2013. The ongoing earnings season will also give the investors some hint of the future plans of the above-mentioned companies.
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