The Big Chemical Companies Are Getting Bigger, Faster, Stronger
April Mergers and Acquisitions Issue
Yesterday was Earth Day and there was a lot of sustainability news released by a lot of companies. I will talk about some of this eventually in a few weeks for the Green Chemistry and Sustainable Polymers Issue in May. Right now, the one thing worth mentioning is that President Biden announced an ambitious goal of reducing carbon emissions from the US by ~50% by 2030 from levels reported in 2005. President Biden is hosting a summit on climate change involving world leaders in an effort to curb global warming. Lisa Friedman from the New York Times reported on the story as it relates to the oil industry:
Mike Sommers, president of the American Petroleum Institute, said his oil industry trade group “supports the goals of the Paris Agreement” but added the new U.S. target “addresses only half of the dual challenge” of reducing emissions while providing affordable energy.
He called on the Biden administration to impose a price on carbon and invest in innovation.
Canada already has a carbon tax that I’ve written about previously. Xi Jiping of China has reiterated that China is on a path to peaking emissions in 2030 and reducing them afterwards. Oil and chemical companies will likely try to implement emission reductions in the coming years with carbon capture and storage being a big topic of discussion. I’ve written about carbon capture previously and I believe that this is useful only if the captured carbon can be utilized to make new finished goods or chemical intermediates.Companies like Covestro and Novomer are happy to turn CO2 into polymers that we can use. In the shadow of Biden’s plans and the potential for a US carbon tax the Mergers and Acquisitions activity in the chemicals space has been very active in the last few weeks.
Angel Mehta reported for Chemistry World that the Chinese government has cleared the merger of SinoChem and ChemChina, the two largest chemical companies in China. ChemaChina is in heavy debt after acquiring Syngenta in 2017 for $43 billion. Bloomberg’s David Fickling called it a failure back in December. ChemChina makes just about everything you can think of, but is in a lot of debt. SinoChem in comparison has cash on their balance sheet to help stabilize ChemChina. This means that the new chemical company will be very large and sponsored by the Chinese government. Mehta reported:
Last year, the US Department of Defence added both Sinochem and ChemChina to a list of entities it regards as ‘Communist Chinese Military Companies’. The broad-ranging power makes the companies off-limits to US investors and sets the scene for punitive sanctions, although these haven’t materialised under the new US administration.
It’s unclear if the new Chinese chemical conglomerate will become profitable globally with the merger, but if there is a too big to fail scenario I think this would qualify. While the combined company is relatively small compared to the overall economy of China I think this is a good example of China holding itself back from become a more influential global power. This merger may also make things more difficult for foreign chemical companies (i.e. the rest of the world) to compete in China if the region’s biggest chemical company is being held up by the Chinese government.
Meanwhile, PPG is keeping true to form and announced their acquisition of a German automotive coatings manufacturer Cetelon while it awaits resolution for its increased offer to buy Tikkurila. AkzoNobel had put in a counter bid earlier in the year and drove the price higher. Ultimately Akzo backed out once PPG came in higher with their counter offer. PPG is still smaller than Sherwin-Williams, but has active plans to keep acquiring companies and after a few hundred million here and a billion there we are talking serious money. Cetelon employs about 95 people globally and specializes in wheel coatings. Cetelon is a small snack while PPG waits on Tikkurila shareholders to decide if they want to sell to the Pittsburgh paint giant (PPG actually stands for Pittsburgh Plate Glass).
Myriam Balezou, Aaron Kirchfeld, and Kiel Porter reported for Bloomberg that SK Capital Partners is in talks to buy Clariant’s pigments business. The sale of the pigments business was relaunched in October 2020 (Reuters) and I wrote about it back in January while Clariant was initiating a reduction in force. In a similar move Huntsman spun their pigments business Venator to the public market in 2017 and commanded a stock price of over $20 per share, which has fallen over the last four years to less than $5 per share today. SK Capital Partners is a shareholder of Venator and if they acquire the Clariant business I could see a potential merger to form a pigments and additives juggernaut. SK Capital is essentially composed of former chemical executives (like my old CEO Randy Dearth) and finance guys that know the chemical industry. This seems like a move that SK Capital could do with ease provided there are no antitrust issues.
If Clariant can accomplish this sale then they will then be laser focused on even higher margin specialty products. The trend over the last five years or so that I’ve been in the chemical industry has been commoditization of specialty products. This means that specialty products that commanded high margins 10-15 years ago are getting undercut by excess capacity from low cost labor cost markets like Mexico for North America and eastern Europe and the Middle East for western European end markets. Dow famously sold their epoxy resin business to Olin back in 2015 for $5 billion, but kept all of their specialty adhesives business that used the epoxy resins. They effectively divested all the headaches of manufacturing chemicals and kept the specialty formulations for themselves (this might belong to DuPont now?). The only thing that might stop the commoditization of specialties would be a pivot towards carbon negative raw materials (more on this below).
40 North Management increased their bid to buy W.R. Grace (disclosure: I work for a former subsidiary of W.R. Grace and 40 North is a majority shareholder of my employer) for a total price of $4.6 billion. Lorraine Mirabella reported on the story for the Baltimore Sun:
Grace had rejected 40 North’s initial offer in November to buy the company for $4 billion, saying the bid “significantly” undervalued the company. After 40 North raised its bid to $65 a share, the company agreed to discuss a sale as part of an ongoing review of strategic alternatives.
The investment firm’s latest offer for Grace represents a 74% premium over Grace’s closing share price Oct. 13, the day before a 40 North representative resigned from Grace’s board, which fueled speculation about a takeover. Shares of Grace rose 2.2% on Thursday, closing at $61.19 each.
Essentially, 40 North believes that the current management of W.R. Grace is mismanaging their catalyst and silica business and thinks that new management could increase value for shareholders. W.R. Grace used to be a family run conglomerate that held industrial companies with a variety of businesses and current business under the Grace name is a faint shadow of its former self. It would be endlessly amusing to me if 40 North merged GCP Applied Technologies and W.R. Grace back together and potentially added in one of their other portfolio companies.
To close out this issue of the newsletter I will take us back towards deals aimed at reducing the environmental impact of chemical companies with the recent joint development agreement between Solvay and Origin Materials.
The two companies are working to produce a biobased polyamide and other automotive polymeric materials that are carbon negative. Origin Materials went public recently and licensed some patents from Eastman. Origin’s patents are assigned to Micromidas (Origin’s name prior to being Origin) and can be found here. From the press release:
Solvay has signed a multi-year capacity reservation agreement for carbon negative materials produced by Origin Materials to create a drop-in ready specialty polyamide, a polymer for internal combustion engine technology as well as e-mobility systems like e-motors and power electronics that can provide resistance to heat, toughness, corrosion, and operate at high voltages.
The companies believe the newly developed and industrialized materials will be in high demand from the automotive industry as it undertakes a massive global effort to decarbonize its supply chains in search of the "zero carbon" car.
Origin is still building their first industrial scale plant so while the materials development might occur in the lab it will be a few years until it becomes commercially viable for Solvay to purchase at scale. Thus, Solvay is willing to buy the product, likely for a specific predetermined price, from Origin and now it is up to Origin to deliver on the cost, performance, and carbon negative life cycle assessment. This is a great deal for Solvay and a great chance for Origin to show they can deliver on a specialty product that will likely command better margins than their biobased PET offering.
The Biden Administration’s goal to cut emissions by 2030 in half will mean that chemicals businesses, oil and gas, cement, metals, and mining industries are going to have to change how they do business. This might mean investment into new upstart companies like Origin, closing down inefficient plants, scaling new energy efficient manufacturing technologies, and looking at ways to capture the emissions from sources of production.
It used to be commonplace for chemical companies to dump their waste into rivers, which seems ridiculous to us now. Maybe it will be ridiculous to our children that chemical and oil companies used to dump their waste CO2 and volatiles into the air instead of capturing and using it as a new raw material. Maybe this year’s Earth Day is a turning point.
Until then the banks financing and helping these deals will be doing the following:
Talk to you next week,