Analysis: BASF-AkzoNobel deal ups restructuring pressure on others.
Release Date: 2019-10-14   |   Concen: 383

* Deal could be a strategic-fit for Akzo, portfolio realignment 
* Further European mergers and acquisitions supported by low oil 

A potential purchase by AkzoNobel of BASF's industrial coatings business could put other chemical companies under pressure to re-structure their businesses if economic growth remains low, chemical-sector analysts said. 

AkzoNobel said Thursday that it was in discussions with BASF about acquiring the business, which produces paints and inks. 

"With the Dow Chemical DuPont merger announced before Christmas, this could place other management teams in other diversified chemical companies under pressure to simplify their portfolios particularly if we continue to be a low growth environment for the rest of this decade," Geoff Haire, global sector head chemicals global research at HSBC said. 

In December Dow Chemicals and DuPont announced their intended merger. The BASF coatings purchase would "not be that material for either company, [instead it would be more] a bolt-on transaction," Haire said. 

With sales in the region of Eur200-Eur300 million, the coatings business did not represent a major part of BASF's business nor have a big impact on BASF's balance sheet, Haire said. 

This was more likely to be portfolio realignment with AkzoNobel and PPG Industries as its main competitors. In effect BASF, was making a call on whether this was a business in which they could be a leader, Haire said. 

If earnings stay under pressure the decision to sell a business, exit a low-margins business or slash costs was clear. "[In other words] you purchase to boost your growth or you get out of this business," Haire said. 

The purchase would give Akzo a bigger market share, a consolidation in effect. 

It was symptomatic of the rest of the industry. Haire said that this was simply a case of the company thinking more clearly about shareholder value in a lack of growth environment. "The world is looking at the glass half empty." "History shows that when earnings are under pressure in the industry, management either look to sell low margin/cyclical business or acquire growth as well as cutting costs. Acquiring BASF's Industrial Coating assets would increase their market," Haire said. 

This was backed-up by other analysts who felt that the proposed transaction suited both companies. 

"I think the BASF business is sub-critical for BASF and additionally has below-average margins due to missing scale. For Akzo it bears the chance to put this business on its platform and therefore increase growth and ROCE [return on capital employed]," Markus Mayer, equity research chemicals, Baader Bank said. 

LOW OIL MEANS MORE CASH FOR MERGERS/ACQUISITIONS 

The low oil price could mean more chemical mergers and acquisitions in Europe, like that proposed between Akzo and BASF, UK head of chemicals and performance technologies at KPMG Paul Harnick said. 

The low oil price has made European chemical companies more competitive and thus more cash rich, giving them an impetus to invest. 

"The decline of the oil price has been pretty positive and has allowed [European] companies to generate a lot of cash in the past six-to-nine months and is likely to lead to more M&A activity," Harnick said. 

But elsewhere in the industry there wasn't much appetite to acquire commodity chemical assets in Europe due to the volatile commodity price risk on continued low oil prices. 

"At higher prices, the European industry becomes disadvantaged again compared to other regions," Harnick said. 

"At that end of the chemical industry the oil price is not a major determinant of profitability." 

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