According to figures from Ernst & Young, private equity firms accounted for 38 percent of deals globally in the chemicals sector in 2003. This is despite the fact that over the last ten years, only 22 of the 94 major chemicals deals (€35 million-plus) involving private equity firms have resulted in an exit.
The report says the chemicals sector has gained in popularity as financial buyers seek to diversify their investments away from the telecommunications and technology sectors, both of which have lost appeal. “The fact is that, as the European chemicals industry continues to adjust and respond to global competitive forces, we have a growing shareholder base represented by private equity sponsors,” said Jonathan Bourne, chemicals sector leader at Ernst & Young.
Despite apparent enthusiasm for the sector – 80 percent of venture capitalists that responded to the survey said they had either a ‘strong’ or ‘continued’ interest – many respondents cited its complexity and said it should be approached with caution. Among the complicating factors are high capital intensiveness; the volatility of raw material supply; currency risk in a highly internationalised market; and environmental and regulatory issues.
Of those respondents with ‘mixed’ or ‘negative’ feelings about the sector, some said they had struggled to make adequate returns, compounded by the difficulty of achieving an exit. “In terms of transactions it has undoubtedly been a buyers’ market until quite recently and there have been relatively few exits via the IPO route,” said Bourne. However, he added that an emphasis on technology and growth via acquisition could raise prospects of good trade sales.
The survey found that, on balance, private equity firms believed that the chemicals sector was worth being involved with, despite the absence of quick exit opportunities. Half of those respondents to have achieved an exit from a chemicals deal said they had achieved a ‘high’ return.
The enduring popularity of the chemicals sector has been evidenced by recent deal announcements, including the $2.5 billion acquisition of four businesses from German chemicals group Dynamit Nobel by Kohlberg Kravis Roberts and CSFB Private Equity, and the $215 million purchase of certain business and product lines from Eastman Chemical by Apollo Management.