Merck pigments attracts PE interest in sale anticipation

Ryan Gould
11 February 2022

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Private equity firms have begun positioning for a sale of Merck KGaA’s Effect Pigments division, sources familiar with the matter said, putting the automotive-exposed unit back on the divestiture pipeline.

Prospective buyers have reached out to investment banks in recent weeks to gauge interest in buyside support for a bid for the pigments maker, whose materials are used in car coatings, cosmetics and packaging, according to the sources.

The German health and materials conglomerate is understood to be in the early stages of deliberations about its options for the business and is yet to appoint a bank to handle a potential sale, two of the sources said. Merck was said to have surveyed interest in a divestiture of Effect Pigments at the end of 2019 amid a slowdown in automotive sales, with a deal thought to be worth up to EUR 1.5bn at the time.

Pigments have become a bright spot for deal activity in the broader chemical sector in recent years as industry players look to future-proof their portfolios. Switzerland's Clariant agreed to sell its pigments unit to Heubach Group and SK Capital Partners for CHF 855m (USD 951m) in June 2021, while Germany's BASF sold its equivalent BASF Colors & Effects to DIC Corporation for EUR 985m (USD 1.1bn) in August 2019.

Merck's focus for Effect Pigments in recent years has been on bolstering margins. The business currently generates EBITDA in the region of EUR 80m on roughly EUR 400m in sales, two of the sources said. A market leader in effect pigments, the division has been more profitable historically and reliably posted margins around 25%, they said.

While the business is expected to appeal to both strategic and financial investors in a sale process, suitors will be required to weigh up the unit's ESG impact on account of its exposure to the automotive industry, two of the sources added.

Effect Pigments forms a small part of Merck's Electronics vertical, which reported EUR 277m in EBITDA on net sales of EUR 937m for 3Q21. The company said headwinds including tightening labour markets, elevated raw material prices and increased freight costs were among issues that could weigh on performance.

A representative for Merck declined to comment.