Chemical M&A Likely to Continue in 2016

Chemicals play an important part in the pharmaceutical manufacturing value chain. So what were the key issues driving deal-making in the chemical industry in 2015 and what may be expected for this year? DCAT Value Chain Insights (VCI) takes an inside look.

The proposed merger of Dow Chemical and DuPont was the major deal in the chemical industry in 2015. A recent PwC analysis suggests the consolidation is likely to continue in the chemical industry as companies look to improve operating efficiencies, expand geographically, and augment customer bases.

Mergers and acquisitions: a look at the numbers 
Merger & acquisitions (M&A) activity in the chemicals industry ended 2015 with a total of 183 deals worth more than $50 million, and a total of $145.6 billion in value, compared with 182 deals going into $84.6 billion in the prior year, according to Chemical compounds, a quarterly analysis of the global deal activity in the chemicals industry by PwC US. The uptick in 2015 deal value also drove an increase in average deal value by 71% to almost $800 million in 2015 from $464.6 million in 2014.

“We continue to expect consolidation to be a driver of M&A activity as chemical companies try to achieve operational efficiency, competitive advantage, geographic and customer base expansion,” said Pam Schlosser, US chemicals leader for PwC, in commenting on the reprot. “Shareholder activism will also continue to play a role as investors seek to right size portfolios with the divestiture of non-core and underperforming business.”

Asia and Oceania led deal activity in 2015 with 131 deals worth more than $50 million with a total value of $27 billion, and 90% of the deals in the region were local transactions. North America followed with 30 deals for a total value of $103 billion in 2015 and also led average deal value driven by the $62 billion transaction that occurred in the fourth quarter, increasing average deal value by 448% compared to the previous year.

Specialty chemicals drove M&A activity in 2015 with 61 deals with a total value of $96 billion, and compared to 2014, there was a decline in volume (from 70 deals), but an uptick in deal value (from $34 billion). Fertilizers and agricultural chemicals also saw an uptick in value when comparing 2014 to 2015, $10 billion to $15 billion, respectively.

“Declining commodity prices and a strengthening dollar continues to remain a key concern for US chemical producers, but other positive dynamic factors could potentially shape M&A activity for 2016,” Schlosser. “We're seeing that the chemical companies are focused on high growth businesses, so driven by the growth in the automotive industry and the recovery in the construction segment, chemical companies continued to invest in these end markets. Low oil prices are also boding well for several chemical segments, particularly in the extremely energy-intensive agricultural chemicals industry where the favorable feedstock environment will free up additional funds for continued deal activity.”

The key deals from 2015  
Chief among the deals announced in 2015 was The Dow Chemical Company's and DuPont proposed merger. Absent this transaction, total deal value in the chemicals sector remained relatively flat, with a slight decline of 1.3% in 2015.

A combined Dow Chemical and DuPont would generate pro forma sales of approximately $83 billion with a market capitalization of $130 billion, placing it as the number one chemical company in the world ahead of the current number one global chemical company, BASF. The plan, however, is to break the company into three separate standalone companies, one specializing in agricultural chemicals, a second in plastics and other materials, and a third in specialty products, which would include electronics, nutrition, and health. The merger transaction is expected to close in the second half of 2016, subject to customary closing conditions, including regulatory approvals, and approval by both Dow and DuPont shareholders. The subsequent separation of DowDuPont would be expected to occur 18-24 months following the closing of the merger.

The agricultural company would unite DuPont's and Dow's seed and crop protection businesses and have combined pro forma 2014 revenue of approximately $19 billion (approximately $11 billion from DuPont and $7 billion from Dow Chemical). The material science company would consist of DuPont's Performance Materials segment, as well as Dow's Performance Plastics, Performance Materials and Chemicals, Infrastructure Solutions, and Consumer Solutions (excluding the Dow Electronic Materials business) operating segments and have combined pro forma 2014 revenue of approximately $51 billion (approximately $45 billion from Dow and $6 billion from DuPont). The specialty products company: will include DuPont's Nutrition & Health, Industrial Biosciences, Safety & Protection and Electronics & Communications, as well as the Dow Electronic Materials business and have combined pro forma 2014 revenue for specialty products of approximately $13 billion (approximately $11 billion from DuPont and $2 billion from Dow Chemical).

The projected cost synergies of each of the new companies is as follows: the agricultural company, $300 million; the material science company, $1.5 billion; and the specialty products company, $1.3 billion. The combined cost synergies of $3 billion for all three companies would be distributed as follows: cost of goods sold (approximately 40%), selling, general, and administrative expenses (approximately 30%), and research and development (R&D) (approximately 10%). To achieve these cost synergies in the agricultural company, the focus will be to: drive seed production and go-to-market cost efficiencies; eliminate duplicative R&D programs, including breeding, traits, and chemical discovery; and enhance supply chain and global site optimization. In the material science company, the focus will be on to: optimize the global footprint across manufacturing, sales, and R&D facilities, capture feedstock and hydrocarbons synergies; and enhance operational excellence in production cost efficiencies. In the specialty products company, the focus to achieve these cost synergies will be to: (1) leverage R&D spend (programs, resources, sites) in the electronics space; (2) optimize manufacturing in the electronics space; (3) leverage raw materials buy in key market segments. In addition, all three companies will seek corporate synergies by reducing corporate and leveraged services costs and realizing procurement synergies. The $3 billion in cost synergies is in addition to the previously announced combined stand-alone cost reduction programs of Dow and DuPont, which included a plan by DuPont to realize $700 million in cost savings to be realized in 2016, and Dow Chemical's three-year, $1 billion productivity plan (2015-2017), which includes $300 million to be realized in 2016 (prior to expected transaction close).

For a pharmaceutical industry perspective, the nutrition and health segment of the to-be-formed specialty products company from the combined Dow and DuPont would be a piece that would have specific supply into the pharmaceutical industry. The nutrition and health segment, which includes excipients, would have an overall revenue base of approximately $4 billion in the combined company. Currently, Dow’s excipients business is part of Dow Pharma & Food Solutions, part of Dow Consumer Care. Dow Pharma & Food Solutions now provides a single interface to Dow technologies and products for the pharmaceutical and food manufacturing markets. It includes excipients, active pharmaceutical ingredients, and functional food ingredients. Dow Pharma & Food Solutions employs 1,200 people globally across nine sites and 15 manufacturing plants. Medical packaging, including pharmaceutical packaging, would be part of the new material science company to be spun off from the combined Dow and DuPont.

With the proposed deal, Dow Chemical is also restructuring its ownership in Dow Corning, now a 50:50 joint venture with Dow Chemical and Dow Corning, to have Dow Chemical take 100% ownership. With Dow and Dow Corning coming together, Dow will extend its participation in Consumer Solutions and Infrastructure Solutions segments. The transaction is subject to customary closing and regulatory approvals.

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