Hard to get out of chemicals

Only 22 out of 94 major European private equity chemicals investments in the last decade has led to an exit, according to a recent report by Ernst & Young. And in spite of substantial investment into the sector over the years, private equity firms remain divided as to the long-term appeal of the industry.

But following a tough few years in the chemicals sector, it appears the tide is turning when it comes to firms making a successful exit. The chemicals sector has been the focus in the bond market of late with several new issues on the way in both the high yield and investment grade area of the market. These include Blackstone-backed German chemicals group Celanese, which is reported to be selling $1.315bn of bonds in two tranches in a high yield issue. French maker of industrial gases Air Liquide and French chemicals producer Rhodia are also both said to be back in the market with new issues.

It is estimated that around €10bn of the European chemicals assets are up for sale with up to 40% directed towards private equity buyers. In 2003, 38% of deals in the sector were private equity-backed. But over the last decade European private equity acquisitions in chemicals consistently outstripped the number of exits.

Jonathan Bourne, chemicals sector leader at Ernst & Young, said: “The fact is that, as the European chemicals industry continues to adjust and respond to global competitive forces, we have a growing shareholder base represented by private equity sponsors.”

But of those private equity investors active in the sector, some have struggled to make adequate returns, compounded in a number of cases by difficulties with exiting. Bourne says: “In terms of transactions it has undoubtedly been a buyers’ market until quite recently and there have been relatively few exits via the IPO route. There remains a challenge to achieve full value as we see companies beginning to put less emphasis on operational efficiencies and more on technology and growth via acquisition, the opportunity of a good trade sale may become more likely.”

Where there might be more opportunity for a successful trade exit it is for chemicals companies to look further afield to America, Japan and India where there is an appetite for these companies to grow internationally.

While chemicals may not provide an immediate return in the same way telecoms or technology has done in the past, the sector is growing ahead of the economy as a whole and chemicals companies can play a part in a balanced portfolio. Of those firms surveyed by Ernst & Young that had managed to exit investments, half had received what they described as a high return and a third had a strong interest in further investments in the sector.