Last year was a bounce-back year for chemicals mergers and acquisitions (M&As) after the challenges of COVID-19, said Hydrocarbonprocessing.
Both deal value and volume returned to historical highs, surpassing pre-pandemic levels. Market valuation multiples also remain elevated. This level of activity has continued in 2022, but there are storm clouds on the horizon beyond the war in Ukraine, including further geopolitical tensions, global supply chain disruptions and inflation levels not seen in more than 40 yr.
Nearly all Q4 2021 chemical sector earnings calls included significant time discussing raw material, packaging, transportation and wage rate cost inflation, as well as pricing action to offset rising costs. It is a topic that is top of mind for most executives. Comparing earnings call transcripts for the top 32 chemical companies from Q1 2019–Q4 2021, the mention of the word “inflation” increased roughly 300%. According to the authors’ company’s 2022 CEO outlook survey, 87% of executives have seen significant increases in input prices. How will inflation affect the chemical M&A market going forward and what should executives do differently?
Winners, losers and due diligence. Nearly all companies are experiencing input cost inflation. The winners will maintain and improve growth and profitability through a combination of dynamic pricing strategy and new productivity initiatives to mitigate cost pressure. While customers are generally receptive to price increases in this environment, strategic pricing is a skillet some companies must relearn. Some sales teams are hesitant to be bold or are restricted by competitive dynamics. Even when customers are receptive to price increases, demand cannot be entirely inelastic to price. On the operational side, many are still struggling with labor scarcity and their innovation model in a post-COVID-19 world, which is restricting productivity initiatives. The losers will witness slower growth and compression in margin and cash flow.
On the M&A front, certain sub-sectors may need to consolidate or sell to survive, resulting in increased activity. Conversely, potential sellers that have been temporarily dislocated by inflation may defer an exit until after they can successfully implement pricing and productivity initiatives to right the ship and improve resiliency in the long term. This is already happening in the market. For example, in March, Spanish energy company Cepsa announced that it has put a planned sale of its chemicals business on hold while it examines the potential impact of spiraling energy prices from the war in Ukraine.
In this new environment, buyers and sellers must refine their approach to due diligence when evaluating a company and its prospects.
As per MRC, the two largest U.S. oil companies, ExxonMobil and Chevron, posted record revenue on Friday, bolstered by surging crude oil and natural gas prices and following similar results for European majors a day earlier.
The U.S. pair, along with UK-based Shell and France's TotalEnergies, combined to earn nearly USD51 B in the most recent quarter, almost double what the group brought in for the year-ago period. All four have ramped up share buybacks in recent months, capitalizing on high margins derived from selling oil and gas.
mrchub.com