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Chemical Distributor Valuations Rise as M&A Wave Sweeps Sector
Posted on September 8th, 2017 by Al Greenwood in Chemicals Industry News and Analysis
The wave of mergers and acquisitions (M&A) hitting the chemical industry has also swept distribution, a sector that has changed over the years as companies began adding more services to their offerings.
That is one of the reasons why valuations have risen for chemical distributors, said Ben Scharff, managing director for the US-based investment bank Grace Matthews.
About 20 years ago, valuations for chemical distributors were three to five times earnings before interest, tax, depreciation, and amortization (EBITDA), Scharff said. Now, valuations can be in the upper single digits to the lower teens.
The rise in valuations reflects changes that have taken place among chemical distributors, he said. Twenty years ago, the business model largely revolved around taking large shipments, breaking them up into smaller packages and delivering those packages to customers. There was not much of a value-added component.
This business model lent itself to a fragmented market made up of several, smaller companies that served regional markets, Scharff said.
At the same time, manufacturers wanted to maintain a direct relationship with their end customers to make sure they were using the product correctly and marketing the material in a way that made sense, he said.
Over the years, chemical distributors evolved by offering additional services. Many now have their own labs and they offer quality-control (QC) services as well as application engineering. Some even offer blending and formulation services.
In addition to these technical capabilities, distributors are also assisting in inventory management and regulatory compliance.
“It is adding value to the end-customer more than just providing a product,” Scharff said.
“Because these distributors have focused on becoming more value-add, they’ve gained the trust of both the suppliers as well as the end customers,” he added. “They’ve proven their worth in the market. They seem to be growing faster than a lot of the end markets that they are serving.”
At the same time, chemical distributors discovered the benefits of consolidation. If a chemical distributor already has a customer base, the company would also have the corresponding infrastructure and sales channel to support serving that customer base.
An acquisition could provide the distributor with more products to push through its existing network. Those acquisitions could also extend geographies or expand customer bases, Scharff said. “It is all very additive through that acquisition process.”
He added: “Everyone’s trying to grow right now. People are doing well, so they have the cash to put to work.”
In fact, the higher valuations are making it easier to justify deals, Scharff said. In this scenario, a company trading at a high multiple can afford to pay a premium while still having the acquisition be accretive to earnings.
Among chemical distributors, private-equity has been eager to make acquisitions. Private equity firms are creating platforms from those deals, on which they add on further acquisitions.
Grace Matthews’s most recent chemical distribution deals involved private equity.
In the first part of this year, Goldner Hawn Johnson and Morrison (GHJ&M) acquired a majority stake in Applied Adhesives.
Earlier, CenterOak Partners acquired Aakash Chemicals, which supplies colourants, additives, and other specialty chemicals.
Aakash is notable because the company has built a business model that is dependent on partner-like relationships with manufacturers in Asia.
Aakash works with those manufacturers to develop products and formulations that address specific customer needs. “This has enabled the business to sell branded products,” said Scharff, “which has resulted in stronger customer loyalty and above average growth rates.”
Deal-making among distributors is part of a larger M&A wave that is reshaping the chemical industry. The biggest among these is the $130bn merger of equals between Dow Chemical and DuPont, which is expected to close on 31 August.
The resulting DowDupont would then be spun off into a materials science, an agriculture and a specialty chemicals company in the following 18 months.
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