Low growth stifling chemicals mergers, study suggests
Low GDP growth has dampened mergers and acquisitions (M&A) in SA’s chemicals sector which is unlikely to see large-scale transactions in 2020, according to a report from one of the world’s largest consulting firms.
This adds to the dim outlook in one of SA’s key sectors, which accounts for about 25% of the country’s overall manufacturing sales.
François Santos, partner at consulting company AT Kearney in Johannesburg, said: “We don’t foresee large deals in SA in 2020, except for discrete assets disposals.”
AT Kearney, which has offices in more than 40 countries, released a new chemicals M&A report which is based on a study of completed and announced deals and a survey with executives in the industry.
Santos said the scope for M&A activity in SA was limited because the chemicals sector was dominated by a handful of companies: Sasol, AECI, Omnia, Afrox and French company Air Liquide. “A transaction in the SA context should involve one of these companies,” he said.
None of the local companies had announced definite plans to dispose of chemical assets, despite the sector taking strain mainly from subdued manufacturing.
“The low GDP growth has dampened the appetite for M&A activity,” Santos said.
Omnia CEO Seelan Gobalsamy said in November after the release of Omnia’s results for the six months to end-September that after steps to reduce debt and working capital, the company would conduct a strategic review of its markets and products.
Without giving much detail, Gobalsamy said the review in the middle of next year would determine if the company should dispose of assets and exit certain markets.
Chemicals group AECI said in July it had sold its 50% shareholding in chemicals distributor Crest Chemicals to joint venture partner and global chemical distribution firm Brenntag for R390m.
Crest, a distributor and reseller of chemicals to a broad range of industries including industrial, paint and coatings, food, mining and water, has been a joint venture between the two companies since 2001.
In the report, based on a study conducted in mid-2019, AT Kearney said the value of global deals plummeted by 67% in 2019, compared to 2018.
Deal activity was expected to shift towards emerging markets such as China and the Middle East.
“The appetite for local consolidation, as well as downstream development in China and the Middle East, are spurring M&A activity in emerging markets,” Thomas Rings, the lead partner of AT Kearney’s global chemicals practice, said.
The number of deals in the Middle East increased six times and the value of deals grew three times. “The reasons for this are the strategic orientation towards downstream integration into chemicals by key players, diversification of local economies, and the search for foreign targets to secure outlets for local hydrocarbon resources,” AT Kearney said.
The sharp increase in Middle East deals is in contrast to subdued M&A activity in North America and Europe.
In the report, the company said deal volume in Europe fell by 20% in 2018, while deal value grew by 26%. Deal volume in North America was down 15%.
The M&A landscape was influenced by the Trump administration’s tax reform and the lack of available larger targets, the report said.