Newsletter 32, January 2011 (No comments so far)
What a difference a year makes
Lets look at some of the trends and development in a bit more detail and try to venture some guesses on what 2011 might bring.What a difference a year makes
Twelve months ago, people in the chemical distribution industry were still worried. The world economy was firmly in recession, business was slow, characterised by low visibility and high volatility. Nobody knew what the government incentive schemes would bring. Market leader Brenntag was working hard to prepare for an IPO in spring, but many observers and industry watchers were very sceptical that they could pull it off successfully. They did it, and with it the whole industry seemed to rebound strongly. As the year progressed, more and more faces were lightening up, and by the time the FECC Conference brought all players together in June in sunny Barcelona, the mood was commensurate with the venue. The second half of the year brought further reports of good results, although it was definitely not back to the “good old days” yet. For some products availability suddenly became a problem and prices began to show a distinct upward trend. After all, marginal capacity had been idled or taken out altogether and the long months of “light maintenance” seemed to take their toll.
Let’s look at some of the trends and development in a bit more detail and try to venture some guesses on what 2011 might bring.
Global economic recovery reasonably well underway
In a recent publication by Credit Suisse, the global economic recovery was described as “becoming self-sustainable in 2011, as near-zero interest rates and high corporate cash offset financial cuts”. However, the analysts there also see “significant divergences among and within the major regions”. This will also reflect in the growth patterns of the chemical and chemical distribution industry. China and India are likely to continue their strong growth. Other emerging markets such as Brazil may begin to slow down a bit, as the new government will address inflation fears. On the other hand, North America is now showing promising early signs of growth. For Europe it is a somewhat mixed picture, with strong growth in the export nations such as Germany, France and the Scandinavian countries on one side and the countries hit by austerity measures and fiscal tightening such as Greece, Ireland or Portugal on the other. Fortunately the first category is made up of the large economies and therefore determines the overall EU outlook. Besides further increases in crude oil and commodity prices that could have a major negative effect on overall demand, major disruptions would possibly come from the geopolitical arena, where the Middle East continues to be a hot-spot and North-Korea an unpredictable wild-card.
Core Business / core customers
In or view chemical producers will continue to concentrate on their core business and their core customers. The first means a more active portfolio management and possible spin-offs. The second means enhanced co-operation with distributors to manage, supply and service their B- and C-customers, i.e. the ones with low volumes and/or low growth and often very specific and non-standard logistics requirements. Chemical producers have also become much more systematic in their approach to distributors and more and more companies see them now as a strategic channel-to-market that needs careful integration as a marketing partner.
M&A (and private equity) is back
M&A is definitely back on the agenda. Last year it started in early February with Univar announcing the intent to take over Quaron (Eurochem), a mid-sized company of ca. EUR 200 mn turnover active in Holland, Belgium and France. The transaction was in the end reduced the Benelux, as the EU commission had only given a partial approval and referred the French part of the transaction to the national authority there. Univar later withdrew their notification to the French agency.
Brenntag started small, acquiring the assets of regional French distributor Metausel, only to continue with the IPO at the end of March. Back then 14.95 mn shares (ca. 29%, sold at EUR/share 50) were listed, including a greenshoe option that was later exercised. Majority owner BC Partners later sold another 21.4% to institutional investors after the 6 months lock-up period at the end of September, so that their holding is now just below 50%. This was certainly the most significant event last year, as it showed the possibility of a successful IPO exit (the shares now trade in the EUR/share 70 to 75 range). Brenntag soon used their financial firing power for the acquisition of EAC Industrial Ingredients, a key player in South-east Asia.
Then it was Univar’s turn again, who in June made a preliminary filing for an IPO with the SEC. They continued to make headlines during the summer months when suddenly an unnamed suitor emerged and the IPO process was suspended. It turned out that the interested party was US private equity house Clayton, Dubilier & Rice (CD&R), who since then became a major co-owner, after buying 42.5% of the shares from CVG. CD&R Operating Partner W.S. Stavropoulos also serves as Non-executive Chairman of Univar. Univar subsequently bought Basic Chemical Solutions, Inc. (BCS), a California based distributor of industrial chemicals with a turnover of ca. US$ 890 mn.
At home in Europe IMCD in August acquired Warwick International Distribution, adding ca. EUR 80 mn turnover and bringing the group just above the EUR 1 bn threshold (2009 pro-forma). IMCD’s owners AAC Capital later sold the company to Bain Capital at a price of EUR 660 mn. In the US another private equity backed deal was announced in early November, in which TPG will buy Ashland Distribution at a price of US$ 930 mn (turnover ca. US$ 3.4 bn). Azelis, after a period when they had focussed mainly on consolidation and streamlining their existing business structure, resumed their “buy & build” activities and announced the acquisition of YDS Chemicals NV (turnover ca. EUR 30 mn).
Also privately owned companies have become more active recently. Due to their size and risk posture they will typically only make smaller acquisitions. Dutch company Caldic acquired Norfoods, a food ingredients distributor in Scandinavia and Omnichem in the UK. German Biesterfeld Plastic acquired French SMPC, giving them more weight in the area of rubbers and elastomers. Canadian distributor Quadra made two acquisitions with René Rivet, Inc. and Street Chemicals.
This increased M&A activity may well continue for a while, as many companies have solid balance sheets and access to debt financing is also easier than before. In addition, private equity is back, as the deals highlighted above show. On a more detailed level, in our view, the large players will seek to grow outside Europe, as they often have a market position in European countries that makes it difficult to bolt-on companies, be it for reasons of supplier conflicts or the risk of a veto by the competition authorities. Particularly Azelis and IMCD will be looking for further growth opportunities to reach a size suitable for an IPO. Asia is on the list for many large companies, due to the high growth rates there. But from a European perspective the Middle East and North Africa (MENA), and from a US perspective Latin America appear to be attractive “adjacencies”. Private equity sponsors are in general showing increased interest, as they perceive the chemical industry coming out of the cyclical trough. Privately owned companies will try to grow and enhance their footprint to stay competitive with the larger companies when it comes to pitching for pan-European or at least supra-national distribution contracts. Many of them have the financial means to play in the game and not all (potential) sellers want to see their company being absorbed by a larger “corporate” entity.
Competition Authorities as a key stakeholder
As the re-dimensioned transaction of Univar acquiring only Quaron Benelux shows, competition authorities are taking a much sharper look at the issue of concentration in the chemicals distribution area. In addition, the recently completed anti-trust investigations in Germany and Austria and Holland (some of which started back in 2007) and a still pending case in France have put the industry under enhanced scrutiny. Consequently any new acquisition will be watched closely. It is also very well conceivable that the past practise of minority cross-holdings among distributors may be scrutinised.
Specialisation and technical expertise as a differentiator
However, the business is not all about M&A or capital markets transactions. There’s a day-to-day business to be run and there are “internal” growth opportunities too. A key driver of growth continue to be good suppliers and excellent contacts with them, particularly as these companies have meanwhile understood the value of a well designed and motivated network of capable distributors. As the producers focus their businesses and shift some of their own growth initiatives to emerging markets with high growth rates, they want their European distributors to take a more prominent role. In industrial chemicals, where the infrastructure of distributors can quite smoothly absorb extra volume this could add nice incremental profits.
In specialty chemicals this will most likely require significant investments in technical capabilities, definitely more well-trained people, but also application laboratories. Customers also have reduced resources, and some distributor have picked the signals up and reacted. Examples for this are the food laboratories of Brenntag, the cosmetics lab of Nordmann, Rassmann or the recently opened coatings lab of Univar in Northern England. However, to make these investments bear fruit in the future, dilution of effort must be avoided. This means that a distribution company taking decisions here must be very clear about what the key market segments / applications are that it is going to select and set its focus on in the future. As a result, we will possibly see a round of specialisation to make sure that these growth initiatives have critical mass and momentum.
Be ready for the ride
As the economy is improving further, distributors can look into the future with more confidence. There are still clouds on the horizon, but as it looks today, these can be circumnavigated by experienced pilots. Volatility will remain rather high and the “good old” pre-crisis days are gone. It may feel a bit like a roller-coaster at times. Not everybody likes that and may therefore decide to head for the exit doors. This in turn opens opportunities for those with staying power and the financial means to buffer disruptions. Overall we see significant upside and wish you
All the best for 2011!
Günther Eberhard
Managing Director DistriConsult GmbH
Contact: geberhard@districonsult.com