Newsletter 24, December 2008 (No comments so far)
Chemical distribution: 2008 in perspective, prognosis for 2009
Reflections on changing timesThe Black September crisis on “Wall Street” led to the collapse of several leading financial institutions like Bear Sterns, Washingon Mutual , Lehman Brothers, AIG, as well as Icelandic Banks and the huge scandal of the Madoff Hedge Fund. It furthermore triggered the demises of UBS, Dexia, Fortis, Natexis, BNP, RBS and other financial institutions including Hedge Funds and Private Equity. By now, it is severely impacting the real economy and particularly the chemical industry, due to its well known "cyclical" character. The information which supports our analysis and prognosis can be found in the 300 news items selected for their industry relevance and published in 2008 on www.districonsult.com. Every month, more than 3500 visitors visit our site in order to be able to better understand the intertwined scenarios of the chemical and distributor industries.
2008 in perspective:
- Strong demand for all chemicals and sharply increasing prices until August
- Declining demand for chemicals and decreasing prices since September
- Slower M&A activities in comparison with previous years. However, we still have 20 reported M&A deals in 2008 versus 30 in 2007:
- We had five deals above €100M, all of them completed in Europe:
- Neochimiki was acquired by Carlyle for the staggering price of €749M in June.
- Atrium Unipex was acquired by Axa Equity for $155M
- Druckchemie was bought by 3i for €133M in a secondary placement, just one year after SG Equity bought them
- Rhodia Asia Trading was bought by Brenntag for an undisclosed amount estimated to be above €100M
- Warwick International, which include both manufacturing and distribution activities, was bought by UK Close Brothers Private Equity for €150M.
All these deals were completed by private equity houses, which overall increased their presence in chemical distribution in Europe
- Distributors are confronted with higher customers’ credit risks, due to the general credit crunch and significantly lower demand for customers' end products in the automotive, building, polymer and coatings industries.
- More restrictions in the M&A field, in order to avoid dominant positions as highlighted by the following cases:
- NU Farm & AH Marks merger suspended by UK OFT Agency.
- BOC & Ineos Chlorine Packaging merger blocked by UK Competition Agency
- Assa Abloy bid for SimonsVoss blocked by the German Competition Agency.
- Heavy fines issued for cartels at European and National levels
- Glass producers: €1.4Bn
- Paraffin and wax producers: €700M
- French steel distributors as subsidiaries of steel producers: €575M
- Regional German road salt producers: €15.6M
- Overall smooth and successful implementation of REACh pre-registration process concluded on November 30th.
- Significant economic slowdown in CEE and Russia.
- Declining value of most European currencies outside the Eurozone, at the exception of the Swiss franc. The UK Pound Sterling lost 30% versus the Euro and is now only slightly above par.
- The Euro currency gained in credibility and attractiveness. Denmark, Sweden, Czech Republic, Slovakia and Hungary are expected to gradually adopt soon the Euro. The Euro protected well the battered economies of Ireland and Spain.
- Most chemical distributors were able to show similar results in 2008 to what they achieved in 2007, but are all very concerned about the outlook for 2009.
Prognosis for 2009:
- The recession in the US and Europe will be the deepest in the postwar time period.
- Slow growth in the BRIC countries and other emerging markets. The Central European economies which are much dependent on exports and on credit financing will significantly decelerate whilst their currencies stay weak.
- Credit will be cheap but hard to obtain. Companies with a strong balance sheet and low debt levels will have access to more generous credit lines.
- Commodities and chemical prices will remain depressed for most of the year.
- Growth will be rebalanced in favor of countries with strong, innovative and competitive industries in place, like Germany. These countries will benefit from lower oil prices. Those countries who de-industrialized and grew significantly their banking and financial services will suffer more, like the UK and Ireland.
- The global banking and financial systems will be restructured and better regulated. A question mark remains: namely how successful will the bail-outs be? Will they be able to eradicate twenty years of unchecked reckless lending and spending practices?
- Banking is an important and indispensable service industry, it should focus on managing properly their clients' and investors' funds as well as their own financial businesses rather than trying to get involved in complex activities which they don't always understand.
- The chemical industry will again enter in a phase of cost cuttings and lay offs. This has already started in 2008. Chemical producers with strong balance sheets and low debts will outperform their weaker competitors.
- Well managed distributors will benefit from additional outsourcing opportunities, provided they themselves do not cut staff and their ability to service their customers and suppliers well.
- Distributors will have better access to competent manpower/human resources released by producers and some of their weaker competitors.
- Significant organic growth opportunities will be available to distributors who have a solid financial position and also have ample manpower resources available to manage them.
- Private Equity houses and hedge funds will change their business model and are likely to have to decrease the value of their portfolios based on the expected performance of the companies they own. Additionally Apollo recently discovered when dealing with Huntsman that there are specific ethical and professional rules in the chemical industry which new entrants have to respect.
- Deals will be made with more equity and less debts, at lower multiples and for longer holding periods. Secondary and even tertiary buyouts will be more difficult to complete as they are built on increasing debt levels and will eventually be based on lower multiples/enterprise values than what we observed between 2006 and mid 2008. New IPO’s will require owners’ patience before being launched in 2012-2014
- M&A project approvals, dominant position, antitrust compliance, information exchange and aspects of "selective distribution" will be more strictly regulated, as can already be oberved in the most recent competition jurisprudence.
Chemical distribution is a great sector with many industrious and successful entrepreneurs. 2009 will be a year of opportunities and challenges for most.
Happy New Year and best Holiday wishes from the DistriConsult team.
Marc Fermont
Leysin, 17 Décembre 2008
P.S At the beginning of this ski season, we are delighted to inform you that www.districonsult.com will sponsor again the Swiss Ski Cross Champion Emilie Serain in 2009. More on Emilie Serain on www.emilieserain.com