KPMG report on dominance of PE deals in European chemicals sector

A recent report by the Chemical Industries Association (CIA) has indicated that 25-30% of deals (by value) within the global chemicals sector during 2003 were private equity-backed. Whereas private equity has traditionally accounted for around 5% of total transaction values in the chemicals sector, the current figure is now closer to 30% in 2003, compared to a rise of 20% in 2000-2002. It is estimated that as many as 1000 European chemical companies are currently under private equity ownership. Present levels of investment could reach 40% in Europe in 2004, with €10bn of European chemical assets currently up for sale. The findings were published in ‘Private Equity in Chemicals’, sponsored by KPMG’s Private Equity Group, Gresham and Cogency Chemical Consultants, which canvassed opinions on the chemicals industry from sixteen private equity houses. According to KPMG’s James Drury, “The dramatic rise we are now seeing in the levels of PE investment in the sector is a direct result of the spate of merger and acquisition activity which characterised the 1990s. Those years have left a legacy of restructuring and debt reduction strategies- many of which are facilitated by private equity investment. The PE houses which were surveyed felt that their interest in the sector was a positive thing, having enhanced financial performance and competitiveness. However, the limited number of exits from the sector to date means that insufficient evidence is available to conclude whether PE houses have successfully generated value through their investments. The realisation of the current crop of investments will go a long way towards demonstrating how successful the PE players are at creating value within the sector.†The report also found that holding periods for investments in the industry were generally longer than the normal time of four to five years. This is due to the fact that many such transactions are part of a buy-and-build strategy or post-carveout corporate restructuring. Trade sale remains the preferred exit route, with the greater opportunity for this occurring in the middle market, where corporate buyers are developing their portfolios with bolt-on and fill-in acquisitions. IPOs continue to be an unfeasible option, with private equity houses considering partial disposals with the aim of creating bespoke portfolio companies to meet trade buyers’ requirements.

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• Southern Europe