On the Road to Recovery | The Condition of the Chemical Industry
It’s no secret that chemical companies have been hit hard by the recession. There was a distinct drop in demand due to a decline in the end user market, particularly the construction and automotive industries. As a result, chemical companies took quick and drastic measures to reduce costs, including shelving growth strategies, implementing layoffs, closing plants, and decreasing production units. These measures helped companies weather the storm, and as demand for commodity and specialty chemicals have begun increasing, the chemical industry now seems on the road to recovery.
In 2010, for instance, the volume of chemical production increased throughout all regions of the U.S., undoing the sharp declines experienced in 2008 and 2009. Production is expected to keep growing – albeit at a moderate pace – in 2011 and continue to pick up throughout 2012.
In fact, Wall Street analysts recently raised 2011 profit expectations for chemical companies based in the U.S. after a solid fourth quarter. Strong volumes and prices allowed most companies to post better-than-expected earnings. For instance, at the end of January, it was reported that DuPont’s sales were $7.4 billion, up 15% when compared to 2010. Earnings were largely driven by a 6% increase in prices and a 12% increase in volume.
In addition, thanks to the cost-cutting measures employed by chemical companies, margins have strengthened, resulting in larger-than-expected cash flows.
As a consequence, there was a significant up-tick in the volume of M&A deals announced in 2010 compared to the year before, indicating the global economy is stabilizing.
In April 2010, for instance, CF Industries Holdings Inc., attained long-time rival company Terra Industries for $4.7 billion. As a result of this acquisition, CF is now the global leader in the nitrogen fertilizer industry with a far-reaching footprint and a total capacity of 6.3 million nutrient tons of nitrogen and 2.1 million nutrient tons of phosphate.
Likewise, on January 10, 2011, DuPont entered into a definitive agreement to acquire Danisco for $5.8 billion in cash and assumption of $500 million of Danisco net debt. The deal will enable DuPont to expand its offerings in specialized areas, such as biofuels. If approved, it will be DuPont’s largest acquisition since 1999, when it acquired Pioneer Hi-Bred International for $7.7 billion.
John Brown is a retired financial advisor specializing in M&A deals. If you would like to learn more about merger & acquisitions in specialized niches visit Valence Group.
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