What's driving the chemical M&A rebound?

Buyers and sellers appear to have become more comfortable operating in an environment that remains volatile but is no longer entirely unfamiliar. Over the last several years, companies have had to navigate COVID, inflation, supply, chain disruptions, tariffs, geopolitical conflicts, changing trade flows, higher financing costs, logistical issues and while a number of these uncertainties continue to be relevant, management and investors have adjusted to them and in general we seem to see they are more willing to transact than they were a year or two ago. Hi and welcome to the Chemical Week Podcast. I'm Vincent Volk. Our guest today is Federico Manella, managing director and head of chemicals and materials at DC Advisory. Federico is based in New York and DC Advisory is the investment banking unit of Daewa Group, which is a major investment bank based in Japan. Federico has been working on Chemicals M&A for a long time so we are going to talk a little bit about what's been going on in the M&A market in recent months and in 2026. I think it's been a pretty interesting year for M&A so a great time to have this conversation. Hi Federico, thanks for joining us. Thank you Vincent. It's a pleasure to be here. So I'll just jump right in here. First off, I mean there's a been a pretty notable uptick in large M&A transactions and chemicals so far this year. What is driving this? I think there are a number of factors that are contributing to this. First, the deal activity is rebounding from a relatively subdued period. So some of what we are seeing is there a recovery from a lower transaction value in the last couple of years rather than just automatically return to what could be construed as peak cycle conditions. In addition, I believe that buyers and sellers appear to have become more comfortable operating in an environment that remains volatile but is no longer entirely unfamiliar. Over the last several years companies have had to navigate COVID, inflation, supply, chain disruptions, tariffs, geopolitical conflicts, changing trade flows, higher financing costs, logistical issues. And while a number of these uncertainties continue to be relevant, management and investors have adjusted to them and in general we seem to see they are more willing to transact than they were a year or two ago. There is also a strategic element, large transactions very often have triggered response from competitors and leading companies to reassess their portfolio priorities, growth strategies, positioning within an industry. And so there is a broader cycle of M&A activity beyond the original transaction. And finally, I think the private equity has been the owner of a number of companies for a number of years and these companies have not been sold. They are now in the 5, 6, 7, 8 year ownership. And so we are seeing more opportunities on the set side from private equity that are coming to market and actually transacting with more flexibility regarding valuation and more flexibility also in terms of finance. Sure and I think you raised the great point there about getting comfortable with volatility. Is that really just a matter of taking a certain amount of time to get your arms around this sort of persistent volatility or is there sort of something specific maybe the management teams have looked at where they have been able to sort of formulate strategies and act around it? Well, I think after a while people we adjusted a bit and now they are being a little bit more comfortable. I think that there is a flexibility that some of the large companies are focusing on. There is even the fact that they are focusing on margin, reservations like the Dow, Karen Carter, the Dow CEO has said to me there is a level of being more comfortable in working in an uncertain environment. However, that has had an impact on some of the transactions that have been slowed down and pushed further out. So not just global perception, but I think it has to be considered in conjunction with the sector issues in the segments in geographic issues. US where people are more favorably exposed to making acquisitions as opposed to Europe, which continues to be beset by structural issues and by energy considerations and restructuring worries. So it depends on geography, it depends on the products, it depends on which segment of the industry, but I do see that as being navigating a little more successfully in the last several months. Sure, and I'm sure we'll get into some of that in the course of the conversation. But I want to ask a little bit here one more thing about the level of activity. I mean, we track activity here a chemical week and we have found, I said, there's been a pretty large jump in announced transaction value driven by some of these very large deals. I mean, we saw the Borealis Bruges, NOVA transactions. There have been a number of pretty substantial M&A transactions. But the total number of transactions has been flatish and one gets the sense, or at least I do from my following the market, that smaller and midsize deal volume hasn't really changed all that much. I mean, is there a structural reason for the seeming bounce back in large transactions while sort of the smaller to midsize market has not been terrible but been sort of uneven or maybe a bit flat? I actually agree to a large extent. Large companies often have stronger balance sheets, more access to capital, greater flexibility to pursue strategic transactions, also new management. Activist shareholders, remember, public companies have, by definition, the possibility of activities shareholders, even today we've learned that HP Fuller has received the potential offer to buy one of their units by an activist investor. New management comes in without being wedded to any specific reexisting strategy. The general idea I have is strategic repositioning portfolio, optimization and the pursuit of scale, not just cyclical growth expectations or so, has driven this. And there is a cascade event because once you see Axonobel merging with Axolta, some of the other people in the same universe are considering what else can do. So there is that kind of activity. It is very visible. Companies like Ashla may now be sold and they have added directors to their board in July and the retail in bankers. So you see that the middle market and the smaller transactions are more sensitive to financing conditions, to valuation expectations. They may be not so sensitive to shareholder consideration, maybe one guy and there is a less fiduciary responsibility in a private company by definition. So there is still a gap between sellers and buyers and the gap has narrowed but has not disappeared entirely. Shifting gears a little bit, I'd be remiss if I didn't ask something about sort of the situation that has dominated headlines for the past few months that of course being the conflict in the Middle East. And how is the Middle East conflict shaping M&A strategy to the extent that it is? Is it an important factor? I absolutely believe it has an important factor but I would differentiate what it has actually impacted and how does it have impacted and to what extent is temporarily or fundamental. So for instance, I absolutely believe the conflict has had an impact on energy markets, on supply chains, on logistics costs and the processional risks. But it has not stopped M&A. Some participants have incorporated geopolitical volatility in the planning assumptions and continue to pursue transactions. I think there are some fundamental changes in this. And of course when we see that there are a number of damage, manufacturing and supply chains, like a polyethylene capacity, which is about, I don't know, 20-25% of the supply had sustained damage in the conflict and will not be online until 20-27. I think that the real issue here will be the change in the strategic thinking. Companies are paying closer attention to supply chain resilience to the manufacturing footprint. So combining with tariffs and the likes of people are now near-shoring, rich, ensuring entire supply chains, the customer proximity and the diversification. The event of these last few years have reinforced the importance of having flexible operating models and diversified exposure. This will have an impact on strategic thinking by a number of companies. The issue that we have now is that what we thought was a relatively short-term impact in the Strait of Hormuzo, so now it seems there's going to take longer and they may not have a visibility for that. So you're going to build it in your pricing, you're going to build in your supply, but the uncertainty continued to play an important role. Sure. I want to ask also a little bit about the other major thing that we've seen in the headlines here, and that's sort of the AI build out. In chemicals specifically, we've seen some valuation multiples, generally over 20 times EBITDA for some assets that kind of have an AI angle, and is the growth there to justify these premiums? Well, the market is assigning a premium to, generally speaking, to assets that can provide meaningful exposure to the AI infrastructure, the semiconductor manufacturing, the electronics materials, the packaging, the thermal management, the data center infrastructure. But at the end, any individual transaction valuation will be justified only if the execution, the positioning, the customer relationships, the margin profile, and the long-term demand growth will support it. So I can say that, obviously, these people have focused on, many people have focused on these markets as being very attractive. They believe that this growth will be structural and long-term in need, not just temporary, not just driven by secret-called demand. But I don't believe that every materials company with an AI-related narrative will command a similar valuation. The highest multiple could be for companies that will have commanding market positions, qualified products, and good customer relationships, and above all, the growth. It's much more relevant to continue to see the growth. But even now, people are a little more hesitant to look at the data center growth, the AI growth, and the life, so at least in the US. So I don't think that this is going to be the main and only differentiating factor. In the end of the day, synergies and efficiencies will justify some of these multiples. And for some of these situations, this is also a diversification move, then try to reposition the entire company. There are other valuation besides just simply the growth. It really depends on which company and what percentage of the overall company is driven by this. You see, I'm saying, so it could be a strategic move to reposition, but also depends on how big it is, yeah, yeah, it's a little bit more of a kind of a scale play, almost. So I do think it's pretty clear that there is a lot of interest in companies that have an AI angle or have a clear tie into that quickly growing part of the economy. But beyond that, which subsectors within chemicals are currently seeing the most interest from buyers? Well, we see generally speaking electronic materials, especially as we mentioned before, services that are exposed to semiconductors to advance packaging to connectivity, thermal management, data, infrastructure. All these themes are benefiting from AI investments and investments in the broader digital infrastructure. This is also pushed if you want by the funds and other investors that really will look at the whole infrastructure, the services of it. So that is one. In other big area, I would say water, water and aviation technologies, especially because people see this as a link to the critical infrastructure and industrial efficiencies, water-based chemicals, and this is true in the States and abroad, and think about transaction in the past like U.S. water and others. Generally speaking, going back to maybe the basic specialty chemical side, specialty materials, advanced materials, engineered polymers, specialty composites, application focused businesses that serve resilient end markets. So maybe people who are focusing on aerospace and defense, more electronics, health care, and even some industrial technology applications. So if the end market is growing, presumably activity in the sector that would serve it even now or at the end of the product manufacturing chain would be relevant. More cyclical commodity-oriented segments are still active, but the investment thesis will be more focused on restructuring, on integration opportunities, cost synergies, consolidation plays, market issues, maybe sometimes you have on pricing and others. But it's really not focused on the top line growth, but it's really a ways of reposition your portfolio yourself. Yeah, there's a lot of right sizing your asset base in those areas or trying to figure out how you can find a lower cost position and maybe globalize that. Right. There is also the private equity groups that want to go is maybe the platform building companies that are private equity groups that have been made an art of buying smaller companies, growing to bigger, then getting out and thinking about arsenal with all the adhesive sector at the time of Zadko and Royal and the Meridian are soft in the colorants, in the paint. So there are companies that really have a thesis and then build around the air, build a kernel and then they go and grow. In this case, I would say what is relevant are companies that are more focused on sector individual sectors that are defensible and that's a difference in my opinion between diversified versus specialty. To me, the specialty can have a defensible moat around the product, the relationships of the margins of their growth. Diversified is far less relevant. You still have mergers, still activities in that space think about all enhancement, but there is a different angle. Sure, you just mentioned private equity and it's come up a couple times in our discussion. So my final question here, I wanted to ask a little bit about private equity, I mean, the sector has really had a tough few years. There is some sign, I guess, that it is improving. What strategies are they adopting to contend with a deal environment that really has changed significantly over the span of three or four years, or even if you kind of go back to the 2010s, I mean, we're in a very different world now with interest rates with the volatility with, you know, what's happening in China and Europe? I mean, how is private equity kind of adjusted to this new reality? Well, I would say in general, there are, I think there are signs of improvement, but it's still a gradual thing is not a bump. Private equity from a sales side, they bought a number of assets in 2018, 2017 to 2021 and they held them longer than originally anticipated due to market conditions and to different disruption issues we discussed, COVID and tariffs and the like. But now there is increasing pressure to go to market to return the capital and move on to the next fund cycle to raise or so. But on the buy side, private equity investors appear to be approaching the market the more selectively, so they don't really buy indiscriminately, they're very focused and there are more people in my opinion, they're looking now for private equity in the chemical space than before. I think you have some ideas why chemicals are attracted. Chemicals, the chemical cycle is now, it's been a down cycle since, I guess, the second half of 2022, there is a corporate supply of assets in a lot of the restructuring and carbounds have been ended up being in the hands of private equity groups, fragmentation and so people can go and some private equity groups are focusing on individual assets that warrant this. Some private equity groups also have really focused very much on some verticals, for instance, chemical distribution has been the topic for and the subject of a number of private equity investments. We said water treatment, the whole case additives are still fragmented, privately owned businesses. More than half of the chemical business in the US are owned by individuals or families or so. That's a huge amount, so we're talking small some of them. I think that private equity is looking at different strategies to focus on it. They will, some of them focus on distressed and underperforming, especially in Europe. The buy and build strategy, a number of them have focused on some ideas and then they grow especially in fragmented markets. I would say another area would be obviously the carbot we discussed. The flexibility of buying companies allowing private ownership to remain, that's the other thing that allows if you have a family, there are companies that have been successfully sold with the owners remaining in, maintaining an interest and then over time they can get out. There are also transactions that have been private equity groups that have decided to sell a stake in their own business and recapitalize while containing an upside. So much more of a flexible structure, the private equity has done. It wasn't just I buy, keep for five years and sell. Now is I buy, maybe I combine it with a larger business, I get the synergies, I'll take a stake, flexible strategies, flexible structures, and the ability to really focus on areas within a larger portfolio or individuals where they could make a difference. Great, certainly a lot going on here and a lot to keep an eye on. So thanks very much for your time Federico. It's been a pleasure and I look forward to continuing our dialogue. Great, thanks again and this is Vincent Volk, signing off for Chemical Week. [MUSIC]