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A study o Industrials & ChemicalsM&A activity by mergermarket,in association with Squire Sanders

GLOBAL

M&A SERIESINDUSTRIALS& CHEMICALS 2012

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2

GLOBAL M&A SERIES – CONTENTS

CONTENTS

Foreword 03

Industrials & Chemicals Overview 04

M&A Spotlight: Chemicals & Materials 13

Q&A: Cipriano Beredo, Squire Sanders 18

About Squire Sanders 20

About mergermarket 22



03

GLOBAL M&A SERIES – INDUSTRIALS & CHEMICALS

On the whole, 2011 and the start o 2012 have

marked an encouraging rebound rom some

exceptionally dicult years. Globally, deal value

reached US$354.7bn – the highest annual level

on record since 2007 – driven by companies’ cross-

border expansion eorts, private equity exit activity

and lingering distress in the manuacturing and

automotive industries.

Internationalisation o business played an

important role in boosting the volume o cross-border deals, which are

coming to represent an ever-larger slice o total M&A. In 2011, 42% o all

announced deals were cross-border in nature, up rom 40% in 2010 and just

37% in 2009. Looking at the rationale behind some o these transactions

brings these gures to light: the acquisition o US-based Thomas & Betts

Corporation (TNB) by Swiss industrials group ABB Ltd, or example, aimed to

strengthen the acquirer’s presence in the North American market, whilst the

US$6.4bn acquisition o French chemical giant Rhodia SA by Belgium-based

Solvay SA is ocused on growth in emerging markets. Even domestic deals

had an international favour in 2011: the $4.6bn acquisition o Solutia Incby Eastman Chemical Company in the US is a case in point, as the combined

entity will pursue aggressive expansion into the Asia-Pacic region.

Multi-billion dollar mergers notwithstanding, the heart o the industrials

& chemicals market seems to lie in the mid-market. Small to medium-sized

businesses still orm the backbone o the US economy and the German

Mittelstand, and this is clearly refected in the numbers. Deal making in the

US$15m to US$500m range rose by over 18% rom 2010 to 2011, and two-

thirds o all deals announced in 2011 came rom the US$5m to US$100m range.

Looking at specic segments o the industrials & chemicals market, industrial

products and services is the most active subsector by ar, with 1,230 deals

valued at US$168bn, ollowed by chemicals and materials with US$43bn.

Chemicals and materials deal announcements were up over 16% in 2011

compared to 2010, making it one o the astest growing industry subsectors

over that period.

Industrials & chemicals is an expansive sector, covering a broad range o

industries – industrial products and services, industrial electronics, industrial

automation, chemicals and materials, manuacturing and automotive –

meaning it will always be among the liveliest markets or M&A. This report

seeks to unpack the sector’s various dierent parts to uncover the key

drivers, challenges and opportunities that characterise the market today.

We hope you nd this second part o our Global M&A Series both useul

and inormative, and as always we welcome your eedback.

William Downs

Partner

Global Practice Group Leader, Corporate and Corporate Finance

Squire Sanders

[email protected]

Welcome to the second report in Squire Sanders’ Global M&A Series. Here we examine thedriving orces behind M&A in the global industrials & chemicals sector, with a detailed reviewo specic industry subsectors and a spotlight eature on chemicals and materials transactions.

FOREWORD



4


Merger activity in the industrials & chemicals space

has closely mirrored trends in the global business

cycle in recent years. The post-crisis recovery

in economic growth saw a revival in industrials

& chemicals dealmaking, which peaked in 2011

– even amid the sovereign debt market jitters

– with 2,692 transactions collectively valued at

US$354.7bn coming to market, marking the highest

yearly level o aggregate deal value since 2007.

Small- and mid-sized industrials enterprises orm

a cornerstone o the global economy and the

mainstay o the sector’s deal market: transactions

in the US$15m to US$100m deal size segment

accounted or every two in three announced deals

with a disclosed value in 2011. Clearly, the nancial

health, growth ambitions and access to capital

or small- and mid-sized enterprises (SMEs) is

crucial or the vitality o the overall industrials &

chemicals deal market, but the headline-grabbing,

transormational tie-ups and takeovers brokered by

the world’s largest industrial groups have also been

a key eature in the post-crisis M&A landscape. In

2011, the number o transactions valued at US$1bn

or more rose by 13% to the highest level in ouryears at 60 transactions.

The stronger corporate appetite or large-cap M&A

has been a boon or vendors and private equity unds

looking to dispose and mature portolio assets have

not been let out in this regard. In total, there were

307 exits worth US$69.3bn undertaken last year,

accounting or 20% o overall industrials & chemicals

deal value and the highest annual value or exits in

the sector tracked by mergermarket.

Some o these deals were blockbuster divestments

with large industrial packaging groups on the buy-

side, including Blackstone’s sale o Pennsylvanian-

based Graham Packaging or US$4.3bn to New

Zealand’s Reynolds Group Holdings and Clayton,

Dublier & Rice’s exit rom Wisconsin-headquartered

Diversey Holdings to New Jersey’s Sealed Air Corp

or US$4.3bn; these two transactions rounded o

the top 10 deals undertaken globally in the sector

between Q2 2011 and Q1 2012.

Fresh investments into industrials & chemicals

companies by buyout houses also proved robust

with transaction activity and value growthoutpacing the sector as a whole by posting

increases o 25% and 44% to a total o 495

transactions worth US$42.2bn. The largest buyout

Industrials & Chemicals M&A trends

INDUSTRIALS & CHEMICALS OVERVIEW

N u m b e r o f d e a l s

V a l u e o f d e a l s U S $ m

Industrials & Chemicals deal size splits by year


Industrials & Chemicals deal size splits by quarter




05


Top 10 Industrials & Chemicals Deals Q2 2011 - Q1 2012

Private equity exits



Private equity buyouts





6


saw Bain Capital and Hellman & Friedman club

together to move on the Swedish alarm solutions

manuacturer Securitas Direct in a US$3.3bn

secondary buyout rom Sweden’s EQT.

Bain was also active in the automotive space,

which witnessed a brisk uptake in private equity

investment last year as the number o buyouts

rose by more than hal to 61 deals, while total

value rose more than three-old to US$4.7bn. Bain

teamed up with GIC, the Singaporean sovereign

wealth und, through its BC India Private Investors

II und to invest US$999m or an undisclosed

stake in Hero Investments, the Indian investment

holding company with interests in motorcycle

manuacturing. Hero Investments used part o the

proceeds rom its private equity backing to pay

down debt ater acquiring a 26% stake in Hero

Honda Motors rom Honda Motor Co or US$853m.

Industrials & chemicals industrysnapshots

Industrial products and services

Industrial products and services, the largestsubsector with 1,230 transactions worth

US$168bn registered in 2011, was a bulwark or

dealmaking. The tailwinds o strengthening actory

output in industrial powerhouses such as the US and

Germany, as well as the momentum o a tentative

global economic recovery, helped sustain deal fow

throughout the year with a high o 331 transactions

brokered in the ourth quarter (the highest level

since mid-2008) even in the ace o increased

economic volatility in the second hal o the year.

Iron and steel producers, which have seen a rapid

spree o consolidation ollowing the drought o

deal activity during the crisis period, saw the

largest industrials & chemicals deal o the Q2

2011 to Q1 2012 period come to market with

Nippon Steel taking over its rival Japanese

counterpart Sumitomo Metal Industries in a

US$22.5bn transaction. Whereas distress in the

wake o the crisis provided a spur to consolidation

in the past, steel manuacturers are now looking

at the burgeoning levels o output rom Chinese

rivals and combining to cut costs, gain synergies

and achieve greater competitiveness.

Chemicals and materials

Globally, there were 409 deals worth US$93.8bn

in the chemicals and materials subsector, with


Subsector M&A volume


Subsector M&A value


almost hal o these taking place in North America.

This comes as little surprise given that the US

holds several o the industry’s global giants

including The Dow Chemical Company and E. I.

du Pont de Nemours and Company.

Businesses o this size and scope (or their

subsidiaries) have historically oered a steady

supply o asset sales and 2011 was no exception:

notable examples rom the year include the

US$340m sale o Dow’s polypropylene business to

Brazil-based petroleum based chemicals producerBraskem SA and the sale o Dow AgroSciences’

European dithane ungicide business to India-

based Indol Chemicals Company or US$50m.

The predominance o the US highlights the

chemical sector’s close ties to the energy sector.

High commodity prices and extended volatility

are at least partly refected in the sale o Dow’s

polypropylene unit, and more activity o this sort

could emerge in 2012. At the same time the

worldwide shale gas renzy has put the spotlight

on North America, where expansive shale plays

have spawned high hopes or inexpensive raw

materials particularly in the US.

ManuacturingIn the manuacturing sector, the shit o production

in labour-intensive industries rom advanced

economies to emerging markets such as China, has



07


done little to dampen the thriving M&A markets

o Western Europe. The region is by ar the most

active in terms o manuacturing, accounting or

roughly 40% o the 382 deals transacted globally

in 2011. With a strong backbone o SMEs active

in areas such as packaging, pulp and paper, printing

and binding as well as the production o business

products, hardware and textiles – particularly

within the German Mittelstand – it is not surprising

that small and mid-cap deals predominate in Western

Europe; the region garnered less than 15% o the

US$27.3bn in manuacturing deal value last year.

While manuacturing deal activity benetted

rom relative stability in the rst hal o last

year, distress in the textile, printing and other

manuacturing segments was more apparent

than in recent years: the number o insolvency-

related manuacturing transactions tracked by

mergermarket rose to the highest level at 26 deals

worth US$195m. The German economy, which

has been a buttress or the eurozone during a

time o pronounced uncertainty, had a number

o insolvency-related transactions in 2011 in

the textile and printing niches. The bankruptcyo schlott gruppe and subsequent sello o its

dierent divisions was one o the most prominent

examples o overcapacity in the print industry

and alling demand stemming rom technological

innovations and the Internet.

Automotive

Despite the prevailing uncertainty last year, the

automotive industry witnessed the astest rate

o increase in deal fow across the industrials &

chemicals space, rising by over 20% to 345 deals

worth US$31.3bn. The surge in private equity

investment was a boon or automotive sector M&A,

but while nancial investors such as Bain Capital

and GIC boosted transaction fows, consolidation

among big automotive players such as Volkswagen

and MAN, Fiat and Chrysler and transactions in the

Chinese market drove sector activity.

In the largest automotive deal last year,

Volkswagen upped its stake in MAN by 26%

to take a controlling share o the German truck

manuacturer or US$7.7bn. The deal sets the

stage or Western Europe’s largest carmaker,

which already owns several o the region’s bestknown brands such as Seat, Audi and Bentley, to

expand into the truck manuacturing space against

rivals such as Daimler and Volvo. Fiat, meanwhile,

Manuacturing M&A by Region

pushed into the North American market. Its chie

investment came as the company exercised call

options or a combined 24% stake in Chrysler Group,

spending a total o US$1.8bn to bring its holding in

the ormerly bankrupt US carmaker to 52%.

Across the Pacic in the world’s largest and astest

growing automotive market, China’s SAIC MotorCorporation acquired a number o auto component,

new energy and automotive service assets rom

SAIC Group or US$4.4bn. An established car market

in Japan with leading international carmakers

as well as rising demand or automobiles among

the Chinese and Indian populations have helped

to make the Asia-Pacic region the second largest

market or automotive M&A with 104 deals

worth US$14.9bn, behind Western Europe’s 131

transactions valued at US$18.1bn.

Industrial electronics

M&A in the industrial electronics niche was

busiest in the Asia-Pacic region, particularly

in China and Japan – although Taiwan, or

its economic size, is a booming market or

dealmaking. Across the world, industrial

electronics counted 197 deals worth US$18bn,

with the Asia-Pacic region accounting or 37%

and 41% o deal activity and value.

Deal activity has been driven by a number o

actors, including sector consolidation, strategic

acquisitions and portolio rationalisation by

electronics groups. Several o the sector’sheavyweights were active last year with Samsung

Electronics, Hitachi, Schneider Electric, General

Electric and Toshiba Corporation, all on the buy-

side o deals. Samsung acquired a 50% stake in

S-LCD Corporation, the South Korean LCD panel

maker, rom Sony Corporation or US$943m as the

Japanese electronics giant sought to monetise its

holdings in the rm and secure a steady supply o

LCD screens rom Samsung.

Another leading Japanese electronics rm,Hitachi, took control o its battery subsidiary or

US$465m, while France’s Schneider increased

its presence in the Chinese market with the

acquisition o Beijing Leader & Harvest Electric

Technologies, the country’s largest supplier o

energy eciency enhancing devices or electric

motors, or US$650m.

Private equity buyouts, which have declined rom

over one in ve o every acquisition in the sector

in 2007, now account or a paltry 9% o industrial

electronics M&A. Mature portolio companies are

now coming up or exit, however, and last year’s

two largest transactions saw private equity rms

on the sell-side. In the largest deal, Allianz Capital

Partners and a consortium o nancial investors

exited Landis+Gyr, the Swiss maker o energy

management products and services, or US$2.3bn

to the Toshiba Corporation, which is seeking to bee

up its energy management solutions business.

Elsewhere, the France-based investment group

Wendel exited Deutsch Group, the French maker

o electronic connectors or the aerospace and

computer sectors, to Switzerland’s TE Connectivity,the world’s largest manuacturer o electrical

connectors, in a US$2bn transaction. Wendel

backed the management o Deutsch Group in



8


a buyout o the rm in 2006 or US$1bn; the rm

will use proceeds o the sale to deleverage.

Industrial automation

With a total o 129 transactions announced worth

US$4.8bn, 2011 saw a 24% surge in deal volume

in industrial automation and a 33% drop o in

deal value compared to the previous year. Looking

more recently, deal fow in Q1 2012 matched

the same period last year with 35 transactions

announced globally, though aggregate value is

slightly depressed at US$637m compared to

US$947m in Q1 2011.

Behind the charge is Western Europe, where deal

fow increased by 68% rom 37 in 2010 to 62 in

2012 and total value rose by 50% rom US$1.1bn

in 2010 to US$1.7bn in 2011. This surge more


M&A volume split by target dominant region M&A value split by target dominant region

than made up or fat activity in Asia-Pacic and

a decline in North America; although US companies

showed a continued appetite or European assets

with 12 deals worth US$353bn compared to 9 worth

US$388bn in 2010. Globally the number o cross-

border deals taking place in Q1 2012, at 57% o

total deal fow, marks the highest quarterly level

since the second quarter o 2008, when 61% o all

industrial automation transactions involved buyers

and sellers rom dierent countries.

Last year also saw an uptick in private equity

activity, which made up approximately one third

o all dealmaking activity in industrial automation.

The number and value o buyouts and exits rose

signicantly on the year prior so that total private

equity deal fow was up 72% and value up 13%.

A particularly positive indicator or the industrial

automation segment is a tripling in the number o

secondary buyouts in 2011 compared with 2010,

illuminating the abundance at present o latent value.

Regional perspectives

In volume terms, Western Europe remains the

top target region or industrials & chemicals

transactions globally, with two in every ve

mergers and acquisitions taking place in the

region. However, the scale o the North American

markets and the presence o some o the world’s

largest industrial groups have helped bolster its

aggregate regional deal value to the top place,

contributing just under 40% o total industrials

& chemicals deal value in recent times.

Notably, while the Asia-Pacic region has seen

a slight increase in its share o global deal volume



09


in the sector to almost a quarter, the region has

seen a much stronger rise in its share o global

deal value with an eight percentage point increase

comparing the periods 2005-2010 to 2011-present.

On the buy-side, the shake-up in the global

economy has seen substantial regional shits

in bidder activity. As a bidder region, North

America witnessed a strong increase, jumping

12 percentage points in its share o global

industrials & chemicals M&A value to account or

44% o the market. The Asia-Pacic region has

also seen a sharp rise in its share o deal value,

surpassing Europe to become the second largest

bidder market ater North America with a 29%

share since the start o 2011 to present rom 20%

historically. The uptick in transormational deals in

North America and Asia-Pacic has seen Western

Europe’s share o global industrials & chemicals

deal value shrink by 16% over the period even as

it remained the world’s most active area on the

buy-side with a 40% share o total bidder activity.

Cross-border

Growing competition in the global economy

is propelling ever greater numbers o strategic

and inancial investors to scout overseas

markets or new acquisition opportunities. In

the industrials & chemicals sector this trend

is much the same with multinationals looking

to break into ar-lung markets to reach new

customers, capture international innovation,

beneit rom greater productivity, better cost

structures and ast-growth markets with long-

term prospects.

M&A volume split by bidder dominant region M&A value split by bidder dominant region

Combined, these actors helped uel cross-border

transaction fows in the sector last year to the

highest level in recent years with 1,144 deals

valued at a combined US$137.1bn. Furthermore,

cross-border dealmaking increased as a proportion

o overall industrials & chemicals M&A, accounting

or 42% and 39% o deals announced in the year.

While the markets o the western world have

subdued economic growth compared to the rapidly

growing emerging economies, these countries

are still the top target markets or doing deals:

seven o the top 10 target markets over the past

18 months have been located in North America or

Western Europe. True, these markets remain top

destinations or deals – in part due to their more

mature deal markets – but they have been losing

ground to emerging markets in recent years with



0



Industrials & Chemicals cross-border M&A trends



Cross-border share o Industrials & Chemicals M&A

% o

f o v e r a l l I n d u s t r i a l s & C h e m i c a l s M & A

their share o total industrials & chemicals M&A

alling rom 80% to 70% rom 2005 to the Q1

2011-Q2 2012 period.

On the buy-side, the picture is not much dierent.

Advanced economies are the top international

acquirers and US acquirers are the most impressive

in this regard. The number o outbound acquisitions

by US acquirers has nearly matched the number o

inbound deals and dollars spent by two to one since

the start o 2011.

Outlook

The outlook or industrials & chemicals M&A is

mixed across the dierent areas o the sector.

Despite a buoyant 2011, volatility associated

with the European sovereign debt crises has

aected global markets, making access to credit

more dicult and dampening the appetite or

M&A among some rms. Despite this general

backdrop or the dealmaking outlook, the picture

is heterogeneous across the dierent geographies

and industrial subsectors.

Globally, commodity and energy prices remain high

by historical standards, putting pressure on margins

or manuacturers dependent on these raw materials

or the production process. With businesses across

the board looking to cut costs in the ace o uncertain

demand, industrials rms acting as suppliers in

the lower part o the production chain may begin

to be squeezed urther by their clients.

These actors could spur consolidation in mature

industries acing low growth or decline such

as automobile manuacturing in Europe, where

buyers with deep pockets rom the US and China

are tipped to be prime bidders or quality assets

coming to market. US carmakers, which remain

in a relatively good position due to Washington’s

provision o unding during the crisis in 2008

and 2009, are well placed to move on these

opportunities. Players rom China will also be

interested in acquiring the technology, skills and

intellectual property o overseas brands.

Industrial automation has been aected by high

energy prices and demand too, with increasing

consolidation in the pumps and valve segment drivenby heightened demand or fow control products.

Propelled by this buoyancy, businesses are looking

beyond their own borders to expand capacity and

enter growing markets, as exemplied by UK-based

engineering group IMI’s two acquisitions in February:

one o amily-owned Italian valve manuacturer

Remosa or US$131m and the other o Brazilian valve

maker Grupo InterAtiva or US$35m.

The scene shits on a regional basis as well. In

Europe, valuations are thought to be comparatively

attractive at the moment, which could pique buy-side

interest, although misaligned price expectations

could be a stumbling block on some transactions.

Nonetheless, in both North America and WesternEurope lower value-added metal bashing industrial

outts, acing sti competition rom emerging

markets, may nd 2012 a good time to sell.

Additionally, there are increasing numbers o

distressed and insolvency-related deals coming out o

Europe already this year, with Wirthwein’s acquisition

o ellow automotive parts supplier ttb and metal

processors L. Possehhl & Co’s takeover o manroland’s

press business serving as prime examples.

Positively, the palliative measures undertaken to

soothe volatility rom the sovereign debt crises

have provided a degree o stability. But austerity

measures have also triggered severe backlash

in some cases, making investors understandablycautious. Upcoming elections in major industrial

countries such as the US may cause investors

to retreat rom dealmaking through the autumn,



11


Top 10 Cross-border Industrials & Chemicals deals, Q2 2011 - Q1 2012



2


Global economic growth

Y e a r o n y e a r %

c h a n g e


especially as recent French elections have been a

stark reminder that leadership changes can quickly

change a country’s business-riendly prole.

In Asia-Pacic there are rumblings o discontent

too: in the wake o the Fukushima nuclear disaster

and the ensuing rise in energy costs, Japanese

manuacturers in industrial electronics are seeing

margins squeezed at the same time that they ace

ever greater competition rom rising stars in South

Korea and Taiwan. They are also contending with

a strong yen, global economic volatility and subdued

external demand in key product and export markets.

Given these global economic pressures, the

most attractive assets will be high value-added,

niche industrial manuacturers that have the

latest technology and healthy margins. However,

competition to acquire such businesses will be steep,

with cross-border acquisitions more commonplace

than ever, and the outlook or private equity activity

back to strength. This will add re to the valuation

debate, elevating the challenge or acquirers and

their advisors as they seek opportunities or growth

amidst a still volatile global economic environment.

Heat Chart

Industrial

products

& services

Chemicals &

materials

Manuacturing Automotive Industrial

Electronics

Industrial

automation

Overall

Asia-Pacic 394 143 84 80 109 36 846

Western Europe 178 28 76 37 16 16 351

North America 56 44 26 31 14 6 177

Central & Eastern Europe 59 20 15 6 6 3 109

Latin America 19 10 13 6 3 4 55

Middle East & North Arica 11 2 7 1 2 23

Sub-Saharan Arica 2 2 1 1 1 7

Overall 719 249 222 162 150 66 1,568

Key

Hot

120

100

80

60

40

20

0

Cold

The Heat Chart is based on 'company or sale' stories tracked by mergermarket over 01/01/2012 to 27/04/2012.

Opportunities are tracked according to the dominant sector and geography o the target.



13

GLOBAL M&A SERIES – CHEMICALS & MATERIALS

M&A SPOTLIGHT: CHEMICALS & MATERIALS

The global chemicals and materials sector was

hit hard by the drying up o the credit markets in

2009. M&A came to a virtual halt that year, with

volume alling 31% against 2008 and value alling

61% to reach its lowest point on record since

2005. The decline was even more pronounced

or private equity, with buyouts and exits both

dropping 48% in volume terms rom 2008 to 2009.

The chemicals and materials sector – which

covers an eclectic mix o subsectors including

petrochemical bases and derivatives,

agrochemicals, ne chemicals and ood additives –

is notoriously cyclical, so investors’ retreat rom the

industry in 2009, and the resulting decline in M&A,

come as little surprise.

But ortunately, neither does the slow and

steady recovery underway since then: in 2011

chemicals and materials M&A increased 16%

in volume and 56% in value rom 2010 to reach

409 deals worth a combined US$93.8bn globally.

Private equity buyouts totalled 55 worth roughly

US$6.7bn in 2011, up 34% in volume and 56%

in value rom the previous year.


Annual buyout and exit volumes

V a l u e o f d e a l s U S $ m N

u m b e r o f d e a l s

Chemicals and materials M&A trends



4


Top 10 Chemicals and materials, Q2 2011 - Q1 2012


Regional insights

From a regional perspective, more than one-third

o M&A targets came rom Western Europe (34%)

in 2011 and 2012, ollowed by the Asia-Pacic

region with 28% and North America with 22%.

Looking at the most active bidders, Western

European and North American acquirers both

accounted or 32% o announced deals, while

the Asia-Pacic region accounted or just under

one-quarter.

Top 5 target and bidder countries by chemicals and materials M&A volume, 2011 - 2012 YTD



15


M&A volume split by target dominant region M&A value split by target dominant region

M&A volume split by bidder dominant region M&A value split by bidder dominant region



6


What’s driving the recovery?

Strategic acquirers’ appetite or growth in

emerging markets has been a dening eature

o the chemicals and materials industry in recent

years, and is illustrated quite clearly by some

o 2011’s largest transactions: the US$6.4bn

acquisition o French chemical giant Rhodia SA by

Belgium-based Solvay SA aims to strengthen the

combined entity’s presence in emerging markets,

which account or 40% o its aggregate sales,

while the US$4.6bn acquisition o Solutia Inc by

US-based Eastman Chemical Company is part

o its strategy o expanding into the Asia-Pacic

region, where Eastman is orecasting a compound

annual growth rate o up to 10% or the next

several years.

Emerging market players have been active

acquirers in their own right. Cross-border M&A

increased by 9% in volume and 152% in value

rom 2010 to 2011, and Asia-Pacic investors

– particularly state-backed entities with an

insatiable appetite or raw materials, technology

and innovation – played an important role inboosting these gures. In one o 2011’s most

notable deals, China National Agrochemical

Corporation, a ull subsidiary o China National

Chemical Corporation (ChinaChem), acquired

a 60% stake in Israel-based Makhteshim Agan

Group (MAI), the branded o-patent agrochemical

producer, rom Koor Industries, the Israeli

investment group.

Three months ater the MAI-ChinaChem

announcement, MAI – still 40% owned by Koor

Industries – paid an undisclosed amount or the

non-mixture diuron herbicides business o E.

I. du Pont de Nemours and Company (DuPont),

highlighting the combined entity’s ambitious

expansion eorts and the increasing competition

rom emerging players.

Corporate disposals, private equity-backed businesses top targets

MAI’s acquisition o the DuPont herbicides

business also brings to light another important

element o the chemicals and materials

landscape, which is the importance o corporatedisposals. Corporate disposals generated roughly

hal o all M&A targets between 2005 and 2011,

coming mostly rom major players like US-based

Cross-border share o global chemicals and materials M&A

% o

f o v e r a l l C h e m i c a l s a n d m a t e r i a l s M & A

DuPont and The Dow Chemical Company or

Germany-based chemical giant BASF SE, and

in many cases going into the hands o oreign

strategic buyers.

Dow’s continuous deleveraging strategy serves

as a case in point. Shortly ater its acquisition

by Dow in 2008, Rohm and Haas sold Morton

International Incorporated, its consumer and

industrial de-icing salt subsidiary, to Germany-

based ertiliser company K+S Aktiengesellschat

or US$1.7bn in April o 2009, and its powder

coatings unit to Netherlands-based Akzo Nobel

NV or an undisclosed amount the ollowing

November. More recently, in 2011, Dow sold

its polypropylene business to Braskem SA, the

Brazilian petroleum chemicals producer, or

US$340m. In an even smaller transaction, Dow

AgroSciences sold its European dithane ungicide

business to India-based Indol Chemicals

Company or US$50m.

Private equity portolios are also providing a

good source o acquisition targets. Two o the

past year’s largest M&A deals involved private

equity-backed businesses, including German

specialty chemicals company Sued-Chemie AG,

a portolio company o US-based private equity

rm One Equity Partners in which Swiss specialty

chemicals company Clariant AG acquired a 96.2%stake valued at US$2.6bn. UK-based Permira and

Austria-based VCP Vienna also sold a 58% stake

in Hungary-based plastic raw materials company

BorsodChem Zrt to Wanhua Industrial Group, the

Chinese polyurethane company, in a US$1.7bn deal.

Another signal that buyout groups may nally let

go o their holdings is strong secondary buyout(SBO) activity, with SBO volume totalling 15 worth

US$4.5bn in 2011 and two SBOs eaturing among

the top ten largest chemical deals globally. These

include the sale o CVC Capital portolio company

Taminco NV, a Belgium-based producer and

marketer o alkylamines and alkylamine derivatives,

to Apollo Global Management in a US$1.4bn deal.

In another secondary buyout, the black carbon

business o Evonik Industries AG, a diversied

specialty chemicals company based in Germany and

also a portolio company o CVC Captial, was sold to

Triton Partners and Rhone Capital in a US$1.3bn deal

with each acquirer holding a 50% stake.

Deal size trends

While the multi-billion dollar deals naturally draw

the most media attention, the most substantial

amount o M&A activity can be ound in the lower

mid-market, dened here as US$15m to US$100m,

where deal volume in 2011 totalled 88, up rom 74

in 2010. And it is these deals that demonstrate

just how ragmented the market remains and

just how many opportunities exist or mid-market

acquirers, both strategic and nancial.

Even in the boom years, there has always been

a steady stream o smaller-scale M&A taking




17


place against the backdrop o mega-mergers and

these deals oten serve as a helpul guide or

where the market is headed. In 2007, or instance,

Rohm and Haas established a joint venture with

South Korea-based SKC Incorporated, valued atUS$183m, to manuacture and market advanced

optical and unctional lms used in the fat panel

display industry.

More recently, some o the larger chemicals

and materials deals have included lower-prole

players like One Equity Partners, a US-based

private equity group ocused on the mid-market

who sold portolio business Sued-Chemie in

a US$2.6bn deal. Even more recently in 2012

another mid-market specialist, Aurelius AG,

a German private equity rm targeting corporate

spin-os and medium-sized independent

companies, acquired a manuacturing site or

crop protection products and specialty industrial

chemicals rom chemicals giant Bayer Cropscience

AG or an undisclosed amount.

Outlook

Corporate disposals and private equity exits

should continue to drive chemicals and

materials M&A through 2012, particularly i

eurozone uncertainties are eased. The year so

ar has seen 100 chemicals and materials dealsworth US$16bn globally, with about 43% o

total deal volume coming rom the US$15m to

US$100m range.

Strategic interest in Sued-Chemie AG and other

private equity-backed companies in 2011 is a

welcome sign that the exit market is growing

more avourable, and private equity rms’

willingness to exit their holdings suggests thegap between buyer-seller expectations are nally

starting to narrow. In one o the most recent exits

o the year so ar, Danish venture capital group

Novo A/S acquired an approximate 26% stake

worth US$708m in Chr. Hansen A/S, the Danish

natural ood ingredient company, rom French

private equity house PAI Partners.

O course, there are other industry-specic

dynamics to consider going orward. While

agrochemicals M&A has been dominated largely

by opportunistic deals, the specialty chemicals

sector is likely to be driven by an appetite or

increasing market share.

“A decade ago, specialty chemicals presented

the ‘promised land’ o higher margins and

less capital investment, and many companies

rushed to signicantly increase their specialties

investments. The result is no surprise: specialties

are now seeing pressure on margins as the

competition to increase market share has become

more intense,” says Carolyn Buller, Partner

and Global Head o Squire Sanders’ Chemicals

Industry Practice.

This ocus on increasing market share is at least

partly refected in some o the year’s larger deals

– or instance, DuPont’s purchase o Danisco,

Ashland’s purchase o ISP and Solvay’s purchase

o Rhodia – and going orward could translate into

smaller scale acquisitions o specialty chemical

companies and product lines.

Other segments such as petrochemicals will be

sensitive to energy sector developments. High

and volatile commodity prices will likely detract rom

the overall appeal o petrochemicals companies,

with Dow’s sale o its polypropylene unit to

Brazil-based Braskem being a case in point, while

the development o unconventional sources like

shale gas will contribute to the appeal o North

American targets.

In this respect, the shale phenomenon has been

a game changer, says Buller: “Up until recently,

the center o the global chemical industry seemed

destined to be moving to the Middle East and

away rom Europe and the US, driven by the

abundance o relatively inexpensive oil eedstock

in the Arab World. This idea has now been

turned on its head, as the shale gas phenomenon

has created an abundance o ethylene and itsderivatives, and set the stage or an abundance

o inexpensive raw materials in the US.”

This is likely to translate directly into M&A

opportunities or the remainder o 2012 and

beyond, particularly as commodity price swings

o the past ew years and political upheaval in oil

rich nations have made energy independence a

top priority. As Buller notes, “Two years ago no

one would have predicted new reneries being

built or old reneries reopened in the US. In 2012,

it’s become a common story.”

Chemicals and materials deal size split by year




8

GLOBAL M&A SERIES – Q&A

Q&ACIPRIANO BEREDO, GLOBAL INDUSTRY GROUP LEADER,INDUSTRIAL PRODUCTS, SQUIRE SANDERS

Cipriano Beredo regularly advises public and

private companies on international mergers

and acquisitions. He has particular experience

advising industrial companies in complex

multijurisdictional acquisition and divestiture

transactions. He has completed transactions in

more than 30 countries and routinely manages

teams o proessionals across the globe.

MM: How has global economic volatility aected

diversied industrial companies’ M&A strategies?

CB: Diversied industrial companies have responded

to global economic volatility by pursuing M&A

strategies to broaden their geographic coverage andreduce their reliance on any one particular market.

As industrial companies search or growth

opportunities around the world, we are seeing

renewed interest in the United States, which was the

most active market or deal making in the rst hal

o 2012. There has been slow and sustained growth

in the US, and while that’s not incredibly exciting, it’s

still attractive when you consider it in light o what

we’re seeing in other developed markets.

The Asia-Pacic region remains a ocus or

industrial companies as well. China remains

critically important and, although there is some

concern about its ability to maintain current

growth rates, the expansion there still outpaces

anything we’re seeing in the US or Europe. You

also have China and India “outbound” investment,

which is increasingly becoming a driver o M&A

activity in this sector. Many established Chinese

and Indian industrial companies are looking to

increase their product oerings, improve their

technology and expand their global ootprint, not

only with acquisitions in the Americas, but also

in Europe, Australia and elsewhere in Asia. Andthe Asia-Pacic story is by no means limited to

China and India. Japan, Korea and Australia, and

Singapore, which provides a gateway to other rapidly

growing economies in the region, are also important

markets or investment by industrial companies.

Finally, diversied industrial companies are

not going to abandon Europe, although, when

evaluating their investments and operations in that

region, they may ocus their M&A strategies on

countries that are considered to be comparatively

saer markets in which to expand or invest, such

as Germany and the UK. European deals generally

might take longer, require more diligence and

involve more negotiation o contingencies than they

have in the past, but they are still getting done.

We’re also seeing strong activity in countries like

Russia and Poland. Most people are amiliar with

the growth Russia has experienced, but Poland still

tends to be under the radar. It’s been one o the most

resilient EU economies throughout the crisis with

an economy that has grown by more than 15 percent

in the past three years. So even within Europe,

there are markets that are attracting M&A activity

in this sector.

MM: Which types o deals have diversied

industrial companies been most eager to pursue?

CB: While there have been a handul o very

signicant mega-deals in this sector so ar in

2012 - Eaton Corporation’s recently announced

US$11.9bn merger with Cooper Industries being

the largest and most prominent example - smaller

deals continued to make up the majority o

diversied industrial transactions.

Companies in this sector are ocused on pursuing

deals that drive growth and allow or expansion

into new and emerging markets. Technological

advancement is also a key deal driver, particularly

with respect to smaller bolt-on acquisitions. The

need to continue reducing manuacturing costs

and concentrate headcount in low-cost countriesare also important deal considerations; however

that desire is oten balanced against the need to

be close to end markets and customers’ production

acilities and considerations o transportation costs

and delivery times.

MM: Which segments o the diversied industrial

sector (e.g. manuacturing, automotive) are

experiencing the most change?

CB: Well, change has been the norm across

all industrial segments or a while, but to do a

deeper dive into one particular area, I would say

the automotive segment has experienced some

o the most signicant changes. Here you have

global businesses that have elt the impact o both

the positives and the negatives o the economy

during the past ew years. We all witnessed

a very precipitous decline in the automotive

segment ater the ‘great recession’ ollowed by

numerous bankruptcy lings, which peaked a ew

years ago. Since then what has emerged is an

automotive industry that has undergone a great

deal o restructuring and is poised or both M&A

growth (particularly cross-border) and urther

market consolidation over the next ew years,

particularly given anticipated expansion in the

light vehicle markets and in Chinese and Indian

businesses expanding their reach into the US

and Europe. While M&A activity in this segment

will still be contingent on the resolution o many

macro-economic actors, some recently announced

transactions, like Visteon’s sale o its lighting

business to an Indian buyer, Varroc, may signal the

beginning o increased automotive deal activity.

MM: Cross-border deals are coming to represent

a larger share o total M&A deal volume in the

industrials sector globally. What do you see as

the driving orces behind cross-border M&A at

the moment?

CB: There are several important actors at work

here. First, we see many diversied industrialcompanies in mature markets like the US and

Europe that may have already maximized the

opportunities in their existing markets, so they

Companies in this sector are ocused on pursuing deals thatdrive growth and allow or expansion into new and emergingmarkets. Technological advancement is also a key deal driver,particularly with respect to smaller bolt-on acquisitions.



19

GLOBAL M&A SERIES – Q&A

need to seek growth rom M&A activity outside

o their traditional strongholds. Second, many

diversied industrial companies are large and

this tends to drive cross-border activity because

their acquisitions need to be bigger in order to

“move the needle” and have an impact on their

nancial results. The larger targets they seek are

oten multinational corporations themselves doing

business in multiple jurisdictions. Finally, there

are an increasing number o large, well-unded

companies rom China, India and other emerging

markets that are stepping up their cross-border

M&A activity. And as there are more successulexamples in the diversied industrials sector o

“outbound” investments by Chinese and Indian

buyers, and as management teams and employees

at target companies become more accustomed to

being directed by management operating out o

Shanghai or Delhi, these deals will only become

more prevalent.

MM: Widespread nancial reorms, including

higher capital adequacy requirements or US and

European banks, have put pressure on lending

activity and restricted access to M&A nancing.

To what extent have nancial reorms aected

nancing availability in the industrials sector?

CB: To make a broad generalization, corporate

prots or diversied industrial companies have

been relatively solid recently, meaning that some

companies in this segment have cash on their

balance sheets to pursue certain transactions with

little or no borrowing. So in a sense you could say

that M&A activities or these companies have

not been so heavily aected by nancial reorms.

That said, a lot o the companies we’re talking

about here are both sellers and acquirers – they

make acquisitions, but they also sell non-corebusinesses. So when you’re looking at the pool

o potential buyers or an asset – private equity

buyers, or anyone else who might participate in

your auction process – and thinking about how

robust a sale process you can run and the multiples

you might get in a sale, the availability o nancing

or potential acquirers becomes a big issue.

And the truth is that it’s really too soon to gauge

the ull impact o nancial reorms on global M&A

activity. A lot o the reorms in Europe are still in

the process o coming online, and those reorms

will inevitably result in an increase in the cost o

borrowing. Further deterioration o the banking

sector in the hardest-hit eurozone countries could

result in even more regulatory activity. Certainmarginal loans aren’t going to be made, you’re

going to be adding some time to the borrowing

process, and as a result adding time to the overall

acquisition process.

So when it comes to the availability o unds

or M&A, all companies need to anticipate that

nancial reorms will limit the global pool o

potential lenders and thereore the availability o

unds. Even the hypothetical industrial company,

whose prots and cash on hand may be sucient

generally to und its M&A program, must pay

attention to these developments. Because there

will be instances where it may want to pursue a

transormative acquisition that’s large enough to

require borrowing, and the availability o nancing

will suddenly be a matter o critical importance.

MM: How closely are acquirers monitoring

developments in the eurozone? How will Europe’s

limited growth prospects over the next ew years

aect diversied industrial companies outside o

the region?

CB: Acquirers are monitoring the eurozone very

closely and keeping an eye on how things are

taking shape, and it’s impacting their decision

making. But companies in the industrial sector

will continue to actively pursue M&A because

in mature industries, M&A is a signicant and

necessary driver o growth. These industrial

companies likely have operations throughout

the eurozone, and they understand the growth

prospects or Europe will be fat or even negative

in the short term and that there will likely be a

period o economic and political turmoil. But I

don’t see them engaging in a re sale – they’re

not going to divest or walk away rom Europe or

sell their businesses or assets in the region at a

deep discount.

So what are their options? They could scale back

their projections or growth. But that course is

not terribly attractive, particularly or industrialcompanies under pressure to deploy assets. So an

alternative is to aggressively pursue M&A in higher

growth regions in part to help balance out the

eurozone risk. This strategy may uel M&A activity

in North America, Asia, and those regions within

Europe that are considered saer, and more generally

in emerging markets, because companies will have

to continue to pursue those markets to use their

capital and nd growth during the next ew years.

European deals generally might take longer, requiremore diligence and involve more negotiation

o contingencies than they might have in thepast, but they are still getting done.

...all companies need to anticipate that nancial reormswill limit the global pool o potential lenders and thereorethe availability o unds. Even the hypothetical industrial

company, whose prots and cash on hand may besucient generally to und its M&A program, must pay

attention to these developments.



0


Squire Sanders is one o the world’s leading

commercial legal practices, with over 1,300

lawyers in 37 oces located in 18 countries.

We have more than 350 transactional lawyers

globally, who provide expert multijurisdictional

and local M&A legal advisory services. Our

lawyers work through more than 20 specialized

industry groups rom energy and natural

resources to lie sciences, healthcare, chemicals

and communications.

Our transactional lawyers are resident in our

oces around the world, providing on-the ground

resources or all o our clients across the Americas,

Asia Pacic, Europe and the Middle East, and in

all o the world’s major political, nancial and

regulatory hubs. With a deep-rooted knowledge o

the many complexities involved in any corporate

deal, such as regulatory laws and faws, nancing

structures, environmental concerns, tax matters and

more, we are able to assemble optimal and ully

integrated teams dedicated to attaining your goals.

In brie, we help our clients to completesuccessul M&A transactions.

William Downs

Partner

Practice Group Leader,

Corporate and Corporate Finance

+44 20 7655 1743

[email protected]

www.squiresanders.com

Cipriano Beredo

Partner, Cleveland

+1 216 479 8280

[email protected]

Carolyn Buller

Partner, Cleveland

+1 216 479 8528

[email protected]

Don Hughes

Partner, Columbus

+1 614 365 2734

[email protected]

Steven Harris

Partner, Houston

+1 713 546 5845

[email protected]

Alan Waxman

Partner, New York

+1 212 872 9831

[email protected]

Nick Unkovic

Partner, San Francisco

+1 415 954 0275

[email protected]

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Consultant, Rio de Janeiro

+55 21 2586 6261

[email protected]

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Partner, Santo Domingo

+1 809 289 4923

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+49 69 1739 2400

[email protected]

Richard Hunt

Partner, Leeds

+44 113 284 7224

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Partner, Madrid

+34 91 426 4842

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Partner, Manchester

+44 161 830 5069

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Partner, Moscow

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Partner, Paris

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ABOUT SQUIRE SANDERS



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