CFI Group is pleased to present the Specialty Chemicals Global H2 2023 (Jul-Dec) Review. This report provides commentary and analysis on current market trends and M&A activity within the Specialty Chemicals sector.
• As compared to 2022, there was a significant decline in 2023 global equity market valuation in the specialty chemicals industry. It was due to a substantially weaker demand from end-use industries, de-stocking after the unclogging of the supply chains, high energy cost, intensifying recessionary effects combined with rising interest rates, and inflation. The higher cost of borrowing, which was a roadblock to deal-making in 2023, could ease amid an anticipated rewind in monetary policies. While economic drivers and market outlooks vary across the chemical industry, we see specific industry sectors with high consolidation potential — namely construction chemicals and CASE (coatings, adhesives, sealants, elastomers).
• Multiples paid in transactions also show a negative tendency with multiples dropping towards and below the 10-year historical values. Despite these effects, the number of transactions remains high in H2 2023, suggesting a sustained necessity for portfolio evaluation and strategic transactions.
• The Asia-Pacific region (APAC) again proved to be a key growth driver, though not as much as expected during the start of the year and with shifts within the region. APAC is expected to continue to hold two-thirds of the chemical market in 2024.
• Despite the hurdles faced in the global chemical market, Indian chemical companies are poised for a promising resurgence in margins. The anticipated recovery, set to materialize from the second half of FY24 will be due to a strong domestic demand and increased global interest in sourcing from India. The growing prominence of specialty chemicals and niche applications, coupled with robust capital investments by Indian chemical firms, underpins this positive trajectory. Lastly, the ‘China Plus One’ strategies employed by major customers fuel this development.
• The Global Chemical Industry is entering 2024 with a positive outlook. Despite the challenges in the past two years, the chemical industry is set to rebound with moderate growth in 2024. While challenges remain, the combined effect of rising demand and industry focus on sustainability, decarbonization, digitalization, and innovation is creating a strong foundation for growth and success in the years ahead.
• Acquirers that held back in 2023 due to uncertainty may be ready to execute in 2024. The stock market is recovering, driving up public market valuations of selling companies, and leading to more common ground in deals. With a mix of potential tailwinds and headwinds, 2024 appears poised for a cautious return to stronger dealmaking activity and higher valuations again.
• While large-scale mergers may remain elusive, increased mid-market transactions, sector-specific consolidation, and innovative deal structures will most likely define the year.
Global Trading Multiples
In 2023, specialty chemicals sector valuations fell, yet global valuation multiples rose due to a sharper decline in company profitability relative to market valuations.
The Industrial Gases sector had the most notable increase in TEV/Revenue multiples, going from 2.0x to 2.4x, whereas Pharmaceuticals and Specialty Intermediaries & others experienced a decline. Similarly, TEV/EBITDA multiples also generally increased, with Petrochemicals more than doubling its multiple from 7.0x to 15.2x, highlighting a significant jump; Cosmetics Chemicals and Pharmaceuticals bucked this trend with reduced multiples.
In terms of TEV/Revenue multiple, Industrial Gases have seen the highest increase within the last year. In 2023, the sector overcame supply chain obstacles that it had experienced in 2022. In 2023, it could position itself for future growth.
Despite high TEV/Revenue valuations in Pharmaceuticals, the sector experienced a 12.2% decline, possibly due to high-profile drug failures, and market access shifts, but still remaining on an above average level.
Due to an increase in revenues coupled with a decrease in profitability, Specialty Intermediates & others saw a decrease in terms of TEV/Revenue while simultaneously experiencing a notable increase in TEV/EBITDA multiples.
Basic Petrochemicals increased its TEV/EBITDA multiple more than 108% compared to 2022 Q4. This significant rise was not due to an increase in enterprise values, which remained steady, but rather a notable decrease in EBITDA from its all-time highs in the post-COVID raw materials price rally. Consequently, Steady enterprise value with shrinking EBITDA resulted in doubling the multiple.
Rising demand expectations for electric vehicles and renewable energy solutions are fueling growth prospects for the Commodity Chemicals sector well into 2024.Reflecting this optimism, the TEV/EBITDA multiple for Commodity Chemicals in 2023 almost doubled.
Cosmetic Chemicals have experienced a moderate decline in its TEV/EBITDA multiple. This can be attributed to the sector specific M&A environment in which strategic buyers are more dominant, looking for synergies and purely financial investors are more selective.
Global Transactions and Multiples
The global median EV/EBITDA multiple for transactions in the Basic Chemicals sector continues to trend negatively from the all-time high in 2021.
The decrease in multiples and slight decrease in transactions can be attributed to several factors. Geopolitical tension in Europe and the Middle East but also regulatory changes influence both metrics.
Even though deal activity has slightly decreased YoY, it is expected that it will increase again in 2024. The general sentiment is that the peak in interest rates has been overcome, making financing on a larger scale available again.
Chemical companies face notable pressure as customer preferences increasingly emphasize decarbonization and sustainability. Simultaneously, these companies must meet the demand for high performance and cost-effectiveness. Balancing these priorities requires strategic agility and innovation.
Overall, the M&A environment in the Basic Chemicals sector has witnessed better times. Similar to H1 2023, the industry is still facing headwinds but with more hope for 2024.
The global Specialty Chemicals’ M&A environment has witnessed an increase in transactions but a decrease in multiples for H2 2023. Part of the decrease is attributable to a statistical effect, as the number is based on a relatively small sample of transactions with published data.
The Argos Index®, which tracks transactions involving private equity, confirms the overall negative trend, exhibiting a continuous decline since 2021, with a slight recovery in 2022 before descending again to 9.0x EBITDA in 2023.
Overall, financial investors, especially private equity firms, have been and are getting more involved in the Specialty Chemicals sector. Even though there has been quite a bit of deal flow in the sector, there still are major opportunities. Private equity firms are expected to influence the M&A environment significantly in the coming years.
Similar to Basic Chemicals, the industry continues to encounter challenges, yet there is increased optimism for 2024.