consolidation as a route to transformation€¦ · 27/11/2017 · segment consolidation is single...
TRANSCRIPT
2
Consolidation as a route to transformation
Presentation by
The Boston Consulting Group
Udo Jung, Senior Partner & Managing Director
Mirko Rubeis, Partner & Managing Director
November 27, 2017
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BCG supports chemical and petrochemical clients in their key issues
• Transformation
programs
• Org development
We annually publish the
"Value creator in
chemicals report".
The 2017 version is now
available @
bcg.perspectives.com
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Part I: State of consolidation of the global petrochemical industry
Part II: Implication of consolidation on GCC producers
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Sources of TSR for top-quartile performers (S&P Global 1200, 1996–2016)
In the long-term, growth is the most important driver of value creation and consolidation enables growth
0
10
20
30
40
Change in annual TSR (%)
10 years
64%
16%3%
17%
5 years
54%
16%13%
17%
3 years
46%
20%
17%
17%
1 year
28%
11%
43%
18%
Revenue growthMarginMultipleFree cash flow
Note: The rolling analysis covers one-, three-, five-, and 10-year time frames from 1996 through 2016. Shows the average of performers in the 65th to 85th
percentile to illustrate approximate cutoffs for the top quartile. ie., not the average of the top quartile (which would be equivalent to the 88th percentile)Source: S&P Capital IQ; BCG ValueScience Center
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-20
0
20
40
-20 -10 0 10 20 30 40
Annual TSR (%)
Average annual revenue growth (%)
Value-creating growth
Value-destroying growth
No Growth
Correlation of revenue growth and TSR (S&P Global 1200, 2006 – 2016)
However, not all growth is value creating!
Source: Compustat; BCG ValueScience Center
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How to master the value triangle?
Value lever
growth
Consolidation
(& value chain
integration)
New growth
platforms
(& diversification)
Portfolio
coherence &
portfolio
migration
Source: BCG Experience
Portfolio coherence means capability coherence
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Companies from asia and emerging markets have led the chemical industry in terms of value creation in the last 20 years
20-year (1997–2016) TSR10-year (2007–2016) TSR Rank
2
1
4
3
5
29.8%
19.1%
19.4%
21.9%
18.6%
23.0%
17.4%
20.6%
22.9%
16.0%
Source: S&P Capital IQ; BCG value creators report (2017); BCG analysis
Value
creation
champions
employed
M&A
and
Consoliation
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150
0
1.500200
500
100
0
50
1.000
102
85
4849
86
4938
66
86
56
392630
No.
of deals$ B
2000
3833
2008 2009 2010 2011 2012 2013 2014 2015
75%
2017
84
166
2003 2004 201620052002 2006
80
2001 2007
After its slump in 2009, M&A deals are on the risein the industry
Mega deals (> $1B)Deals > $10BNo. of deals Normal dealsSelected deals:
Buyer/target ($x.xB)
Note: Announced M&A worldwide deals from January 1, 2000, to YTD Q3 2017, with a chemical company involved as buyer, seller, or targetSource: Thomson ONE; BCG analysis
BOC/Linde
($15.5B)
Basell/Lyondell ($18.8B)
ICI/Akzo Nobel ($15.7B)
Rohm&Haas/D
ow ($18.5B)
DuPont/Dow
($68.5B)
Syngenta/
CNAC ($44.2B)
Airgas/Air
Liquide
($13.4B)
Sigma Aldrich/Merck
($16.5B)
Cytec/Solvay ($6.1B)
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Apr-14Sep-10
20,0x
15,0x
10,0x
5,0xDec-17Jun-17Jan-17Jul-16Feb-16Sep-15Mar-15Oct-14Nov-13May-13Dec-12Jun-12Jan-12Jul-11Feb-11
Solvay/ Rhodia
HB Fuller/Royal Adhesives
BC Partners/Ceramtec
BASF/Solvay Polyamide
Evonik/Huber Silica
Solvay/
Cytec
CCMP Capital/
Solvay ECO
Services
Solvay/
Chemlogics
Blackstone/Solvay Acetow
Advent International/
Cytec—Coating Resins
Cytec Industries/
Umeco
Carlyle/Atotech
Lanxess/Chemtura
Golden Gate Capital/
Angus Chemical
CD&R/
Ashland Water
Technologies
Cinven/
CeramTec
(Rockwood)
Golden Gate Capital/
ArrMaz Custom Chemicals
Carlyle Group/
DuPont—
Performance
Coatings
Apollo Global
Managemant/
Taminco
Berkshire
Hathaway/
Lubrizol
Dow/
DuPont1
Agrium/
Potash
Symrise/
Diana
Bayer/Monsanto
ChemChina/Syngenta
Sherwin-Wiliams/
Valspar
Evonik/Air Products
Performance Materials
Lonza/Capsugel
Air Liquide/
Airgas
Platform/
Alent
3M/Polyphore
Mosaic/Vale fertilizer assets
Westlake/Axiall
Praxair/Linde
IMERYS/Kemeos
Lanxess/Chemours Clean & Disinfect
Allnex/
Nuplex
Lonza/InterHealth Neutraceuticals
Air Products/YingdeHubei Sanonda/AdamaKraton Polymers/
Arizona Chemical
Dow
Chemical/
Olin
Apollo Global
Management/
PAH/OM GroupTronox/
FMC
Albermarle/
Rockwood
FMC/Cheminova
Platform/Arysta
Arkema/Bostik
Eastman/
Taminco
Kraton Polymers/
Styrenic Block
Copolymer
Business of
LCY Chemical
Chemtrade/
General Chemical
W.R. Grace/
Dow Polypropylene
& Catalysts
Altana
Rockwood Clay
Based Additives
Praxair/
NuCO2
Consortium/
OM Group –
Advanced Materials
Royal DSM/Kensey Nash
Ecolab/Champion Technologies
EcoLab Inc/
Nalco Holding
DuPont/
Danisco
China National Bluestar/
Elkem (Orkla)
Clariant/SudChemi
Lonza Group Ltd/
Arch Chemical Inc
Eastman/Chemical/
Solutia Inc
Ashland Inc/
International Specialty
Products (ISP)
Rhone and Triton/
Carbon Black
M&A activity continues to accelerate
Strategic Financial
Overall average transaction multiple:
Average transaction multiple of strategic acquisitions:
10.4x
10.8x
Average transaction multiple of financial acquisitions: 9.0x
1. Not to scale. Represents the companies' blended average unaffected multiple
Note: Bubble sizes indicate enterprise value; Naming convention: Acquirer/Target
Source: Capital IQ, mergermarket, BCG analysis
Key chemical deals—EV and transaction multiple Multiple of last twelve month EBITDA
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Consolidation is happening across all areas in the chemical industry to build scale and drive synergies
Diversification and new growth
platforms Base chemicals and polymers Specialty chemicals & gases
Selected large M&As
from the last 3 years
PVC
Stryenics
PVC
PVC
Agro
Agro
Additives
Silica
Additives
Gases
Gases
Source: Thomson One deal Database; BCG Analysis
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North America, Europe and China dominate the consolidation landscape with ~ 80% of all deals
Value of consolidation by geography1 ($ M, 2007-2017)
300
200
100
0
$ B
Rest of World
26
Middle East
& Africa
22
Asia (ex-China)
106
China
111
Europe
230
North America
296
1. Region is allocated on the basis of region of headquarters of the acquirer company Note: Announced M&A worldwide deals from January 1, 2005, to YTD Q3 2017, with a chemical company involved as buyer, seller, or targetSource: Thomson One deal Database; BCG Analysis
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Some companies have used consolidation to build leadership in specific product segments (example – INEOS in PVC)
• Minority stake in EVC ('01); full share
purchased ('05)
• Other vinyl unit purchases from
Norsk Hydro ('07), Tessenderlo
Chemie ('12)
• Inovyn JV with Solvay ('15); full
purchase of Inovyn ('16)0
10
20
30
6,000
4,000
2,000
0
kT
15
31.0%
10
%
19.6%
05
15.2%
00
13.6%
Ineos share (Europe)EDC VCM PVC
PVC chain consolidation
Source: BCG Chemcom 2.0; Nexant; Thomson One Deal database; BCG Analysis
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Some companies are using consolidation and subsequent "carve-outs" to create 'coherent portfolios'
50/50 merger creating a
global leader in agriculture,
material science and
specialty products
I. Agriculture
Revenue ~ $19B
~$11B
Agriculture
~$7B
Agricultural
sciences
III. Specialty products
Revenue ~ $21B
~$15B
Electronics
Communications
Safety and
Protection
Nutrition
Industrial
biosciences
~$6B
Consumer
solutions: Dow
Electronic
Materials
II. Material science
Revenue ~ $43B
~$41B
Performance
Plastics
Performance
Materials
Infrastructure
Solutions
Consumer Solutions
~$2B
Performance
Materials
1. $2 B from Consumer Solution, $2 B from Infrastructure Solutions and $4B from Performance materials to be moved. Revenue numbers include changes from Split; Source: DOW – DuPONT Investor Communication; BCG analysis
$8B business
recently announced
to move from
Material Science to
Specialty products1
From Performance
Materials
From Consumer
Solutions
From Infrastructure
Solutions
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Segment consolidation is single most relevant M&Adriver
Key M&A rationales – % of deals
Recent deal examples
Acquirer Target Deal value
Geographic Expansion
8%
Portfolio Expansion/
Complementary Portfolio
24%
37%
Feedstock Access
22%
Segment Consolidation1
Financially motivated
47%
$2.3 B
$66 B
$0.4 B
$4.9 B
$5.0 B
coatings
Chlor alkali
1. Achieve (global) leadership position within certain Chemicals segmentNote: Share of top deals > 2bn. USD (N=51) announced between 2007 and YTD 2017; Several rationales can apply for each dealSource: Thomson ONE; BCG analysis
Polypropylene
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2.0%
Henkel
–
Nat’l
Starch
(2008)
14.1%
10.0%
10.6%
5.4%
5.2%
BASF
–
Ciba
(2009)
12.0%
Evonik
–
Air
Products
(2016)
7.4%
Akzo
–
ICI (2008)
8.8%
Solvay
–
Rhodia
(2011)
4.8%
Aditya Birla
–
Columb.
Chem.
(2011)
5.0%
East-man
–
Solutia
(2012)
2.9%
Ashland
–
ISP
(2011)
3.1%
PPG
–
Georgia
Gulf (2013)
3.5%
Ecolab
–
Nalco
(2011)
3.7%
Solvay
–
Cytec
(2015)
5.7%
Sherwin
Williams
–
Valspar
(2016)
6.0%
3.3%
DSM
–
Fortitech
(2013)
10.0%
BASF
–
Cognis
(2010)
9.4%
Merck
–
Sigma
Aldrich
(2015)
9.6%
6.3%
Clariant
–
Süd
Chemie
(2011)
8.9%
1.8%
7.1%11.9%
East-man
–
Taminco
(2014)
5.0%
Air Liquide
–
Airgas
(2015)
5.6%
Ecolab
–
Cham-
pion (2013)
12.5%
ADM
–
Wild
Flavors
(2014)
13.9%
4.1%
DuPont
–
Danisco
(2011)
16.4%
9.8%
6.6%
Dow
–
DuPont
(2016)
Our analysis shows that consolidation creates growth and cost synergies on an average of 8%
Total synergies
Cost synergies
Growth synergies
Synergies as percentage of target company sales
2008–2016 acquisitions in the chemicals/life sciences industry
~8%
Source: Acquirer or target investor relations reports, analyst reports; BCG analysis
Winning Strategic rationales of M&A however are more crucial
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Consolidation prevents mature markets from Eroding competitiveness
PP StyreneHDPE
82%
58%
38%
86%
32%
76%
59%
55%
67%
30%
73%
62%
42%
57%
31%
North America
Europe
Asia
Global
Middle East
Top 5
capacit
y s
hare
in e
ach
of
the m
ark
ets
(2016)
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Global M&A activity level of champions in the chemical industry
0
5
10
15
20
0.6 0.80.20.0 1.80.4 1.6
10 year TSR (%)
10 year M&A Activity Level1
DuPont Lotte Chemical
Solvay
CF Industries
PPG
Sherwin Williams
DSM
Bayer
SABIC
FormosaPlastics
Sinopec
DowChemical
BASF
Deal Size, $5B
1. M&A Activity Level: (Deal values Acquisitions + Divestments)/current Market Cap
Source: Thomson ONE Banker; Thomson Reuters DataStream; BCG Analysis
Deal value last 3 years
21
Ultimately, consolidation can lead to different 'winning business models'
Multi-
specialties
• Segment consolidated
• Superior performance
• Size limitations
Diversified
Value chain
optimizers
Feed stock
monetizers
• Leadership in several
specialty segments
• Parenting advantage
across segments
• Portfolio coherence?
• Portfolio migration
• Feed advantage
(partially eroding)
• Offer SOEs
• Value chain consoli-
dates and integrators
• Coherent portfolio,
deep integrations
Focused
specialties
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In summary, consolidation can enable value based transformation
Become a market leader via segment consolidation & roll-up
(Ineos – PVC, Styrenics; Indorama – PET, LANXESS- additives)
Portfolio migration towards more coherence for superior
shareholder returns (e.g. Dow DuPont, Solvay, LANXESS, ...)
Support value chain integration to capture additional value
(e.g. Indorama – PET; Borealis – compounding & recycling;..)
Move to new segments & leverage capabilities
(e.g. Merck – Millipore, Sigma Aldrich, DuPont – Danisco..)
Improve competitiveness via cost synergies – incl. site
network (e.g. BASF – Ciba)
Accelerated capability building (e.g. SABIC – GE Plastics;
ChemChina – various;....)
Sometimes Consolidation is a necessity and not just an option
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Part I: State of consolidation of global petrochemical industry
Part II: Implication of consolidation on GCC producers
24
GCC petrochemical producers are facing several challenges
Lower oil prices depressing petrochemical prices
Increasing self-sufficiency in China
Reduced availability of advantaged feedstock in GCC
Removal of feedstock, power subsidies
Limited local demand for chemicals
Internal
factors
External
factors
Increasing competition from US shale producers1
2
3
4
5
6
26
Growth for GCC producers is currently constrained
Base chem.Intermediate /
Comm. chemicals
High volume
spec. chemicals
Niche or application
specialty chemicals
Base
chemicals /
commodity
Downstream expansion
Current Portfolio
I. Expansion of commodities• Critical mass needed to explore investments in other regions with
advantage feedstock (e.g. US)
II. Expansion into selected derivatives/
high vol. specialties • Critical mass needed to partner or acquire key
technology owners
III. Expansion into niche or low
vol. specialties • Critical mass needed to invest
internationally close to demand
centers
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Industry consolidation will help GCC producers to improve competitiveness
Scale up
marketing
Achieve
portfolio
coherence
Reduce cost
Enhance
capabilities
Increase
attractiveness
to potential
partners
• Build scale in certain products and help
develop market leadership; develop
international marketing to capture more
value
• Merger and carve out of portfolio to develop
focused portfolios (e.g. specialty only,
commodity only)
• Reduce cost through scale and synergies
• Leverage complementary capabilities and
scale to invest in innovation
• Increase competitiveness and scale to
increase attractiveness to other partners; can
also help in expansion of feedstock to other
advantaged regions
✓
✓
✓
✓
✓
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Consolidation will also support economic development agenda of GCCcountries
Increasing competitiveness of smaller stand-
alone companies
Creating regional champions in some product
segments and competing with global peers
Laying the foundation for value chain integration
– developing derivatives linked to core production
to support downstream industries
Increasing the competitive advantage of
production clusters (e.g. large sites like
Jubail, Yanbu)
1
2
3
4
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ME players can think about consolidation along 3 geographical dimensions
Limited to KSA which has several
players
Outright acquisitions difficult due
to presence of NOCs; but possible
JVs or other forms of cooperation
Can try to build "product
champions" for specific products
where ME players have relevant
global shares
Global
Regional
In
Country
30
Also, consolidation is not only M&A
Shared servicesCollaboration on shared services
functions
Site synergiesOutsource and sharing of
site services
Marketing agreementCompanies combine forces to capture value
from join marketing of certain products
Level of complexity in execution
Benefit accrued to
participating
companies
High
Low
Low High
JVs/ PartnershipsForming JVs for specific
projects/ products
M&AFull merger &
acquisition of companies
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Consolidation could result in different 'champions'
Commodity
champions (e.g.
polyolefins)
GCC based "semi-
specialty" player
GCC based
"downstream
integrated player"
1
2
3
More value capture from markets
through better pricing and better
Marketing & Sales network, product
portfolio
More value from consolidation of
coherent semi-specialty product
portfolios and specialization
More value from integration and
economies of scale
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M&A is risky – our research shows that >50% are not successful
On average, more than 50% of all acquisitions
destroy value
1-year RTSR of completed acquisitions1 (%)
Value
Destroyed
53%
Value
Created
47%
1. One-timers made 1 acquisition within the 5-year period, 1 to 2 acquisitions within the 10-year period, and 1 to 5 acquisitions over the 25-year period observed 2. Active buyers made 2 to 5 acquisitions within the 5-year period, 3 to 10 acquisitions within the 10-year period, and 6 to 25 acquisitions over the 25-year period observed 3. Portfolio builders made more than 5 acquisitions within the 5-year period, more than 10 acquisitions within the 10-year period, and more than 25 acquisitions over the 25-year period observed 4. RTSR = relative total shareholder return one year after the announcement date. 5The share of successful deals includes the percentage of deals in each category with a positive RTSRSource: Thomson Reuters Datastream; Thomson ONE Banker; BCG analysis. Note: This analysis is based on 37,299 transactions between 1990 and 2014
Success rate varies by type of acquirer
43
%Acquire opportunistically, not
an active part of the strategyOne-Timer21
51
%Executes deals on a regular
basis to strengthen portfolioActive-Buyer32
56
%Consolidate through serial
acquisitions
Portfolio-
Builder43
Deal performance below
average deal
Deal performance above
average deal
33
We recommend a thorough review of 5 key elements before GPCA members begin consolidation
Stand alone
attractiveness
1
2
3
4
Additional strategic value optionCareful attention should also be paid while evaluating the strategic advantage of consolidation (e.g. preempt competitor moves)
Improvement of joint competitive positionAbility to improve target (teach) and learn from target in spec. segments
SynergiesTop-line, bottom-line and EBITDA impact
Transaction feasibilityValuation, legal/financial risk, integration risk. In case of ME regulatory hurdles, an inadequate infrastructure for M&A can should also be taken into consideration.
5
1. Key criterion to assess stand-alone attractivenessSource: BCG analysis
Stand-alone attractivenessPortfolio attractiveness1
Emerging markets exposure Sustainability1
2
3
4
5