In a busy chemicals M&A arena, Barclays' EMEA team has been making waves. Edward Russell-Walling looks at its work on the acquisition of the US's Airgas by France's Air Liquide, as well as compatriot Total's sale of Atotech.
Mergers and acquisition (M&A) activity has been hitting all-time highs in the chemicals sector recently, driven by a wave of consolidation and rationalisation. One of the busiest Europe, the Middle East and Africa (EMEA) chemicals teams is at Barclays, which advised France's Total on the fast-track disposal of its Atotech chemicals business.
In 2016, the number and value of chemicals M&A transactions rose to new levels both globally and in the EMEA region, making this one of the most active sectors for M&A bankers in general.
A consolidatory catalyst
"Large deals have been driven by consolidation," says Jean de Miramon, Barclays' head of chemicals for EMEA and vice-chairman of the bank's French banking operations. He points to 2016's $13.4bn acquisition of US company Airgas by France's Air Liquide, in which Barclays was financial adviser to the acquirer.
Praxair of the US followed this up in December by announcing its own $35bn purchase of Munich-based Linde. "Values are very high because of consolidation, and there is a lot of money in the market," says Mr de Miramon. "High market valuation and cheap financing have made this a good time to sell. There has been an appetite from financial sponsors for a long time and we have seen European strategic buyers for a while now."
Barclays is also acting as financial adviser to Canadian fertiliser manufacturer Agrium in its $36bn ‘merger of equals’ with its co-national and rival, Potash Corp. The deal has been approved by shareholders and is expected to close by the middle of this year.
High valuations have acted as a spur for large players to weed out their portfolios and sell non-core businesses, according to Nicolas Paquet, Barclays' Paris-based head of M&A for France and Benelux. "They review their strategic options regularly, and it's a good time to launch disposals of those assets," he says. "That's where supply meets demand."
Knock-on effect
Big mergers often create a supplementary M&A market in conflicted assets, where buyers are forced to sell particular businesses in order to gain regulatory clearance. After buying Airgas, for example, Air Liquide was obliged to sell a number of its US assets, which went to Matheson TriGas. Barclays advised the seller on the transaction.
Mr de Miramon notes a couple of other unfolding trends in this market. One is that the number of trade sales is on the rise. "Anything from 25% to 50% of deals in the chemicals sector used to be done by financial sponsors," he says. "But now we are seeing more strategic players getting involved."
Another is a shift in the concentration of activity from Asia to the US, as a function of shifting growth patterns. Mr de Miramon points out that European chemicals companies used to have up to half of their sales in Europe. But Europe's economic stagnation has prompted them to grow sales in Asia (organically) and in the US (by acquisition).
"The European industry has invested a lot in capital expenditure, and now in M&A, to be more global," he says. "The focus in the past was more on Asia and China, because that's where the growth used to be. But now it's more on the US."
Hence Air Liquide's move on Airgas. The French company wished to be more exposed to the US market and, as the number three US player, Airgas was the biggest feasible target. "It was one of the largest acquisitions ever in France," says Mr Paquet. "But Air Liquide had to do it very smoothly, and it had to move before any other players did."
The Airgas deal showed how the Barclays team works, taking a tactical rather than a mechanistic approach, according to Mr de Miramon. "One of the key tactics to win the deal, given known appetite from other industry players, was to introduce Air Liquide as the most appropriate home for Airgas's activities, management and employees, " he says. Barclays also provided what he calls "tactical" or bridge financing.
Total success
The Air Liquide transaction led to the mandate from France's biggest company, Total. "We delivered very well on Air Liquide and, in May 2016, we won the Atotech deal after a very selective request for proposal," says Mr Paquet. "Total wanted to close before January 2017."
The team now had to move fast, to prepare both the market and the company in order to achieve the best value. The private equity community was an obvious target. But to put what Mr Paquet calls some "pepper in the soup", it was necessary to attract other buyer types – trade buyers, sponsors from different geographies and non-traditional financial investors. They would have different views on value and help to create competitive tension.
Total, under pressure from prolonged oil price weakness, has set itself a target of $10bn in disposals by the end of 2017. It acquired Berlin-based Atotech, which makes chemicals for circuit boards and semiconductors, when it merged with Elf Aquitaine in 1999.
Atotech is an extensive organisation, active in more than 40 countries, employing in excess of 4000 people and with annual sales of more than $1bn. However, there was very little information in the market about the business, so the pre-marketing phase was slightly longer than usual. "We didn't want to launch the process without sufficient investor education," says Mr Paquet. "So we had a longer preparation phase at the cost of a slightly shorter phase one bidding period."
Barclays called for non-binding offers by the end of July, with the promise of a stapled financing package. Mr Paquet reports a "good level" of competition, with bids from a number of Western private equity houses, peppered by some Asian and non-traditional financial buyers. This put some pressure on the private equity bidders.
The idea here is that US and European private equity firms all use the same model and do the same sums, so each knows how the other is thinking. They can then play tactical games and make low-ball offers. The introduction of different bidders with less visibility tends to put them out of their comfort zone and encourage more realistic bids.
Bidders lined up
The bidding entered round two in August. "Don't ever say you can't work in France in August," says Mr Paquet. Among the early interested parties were China's Sinotech, which had partnered with CVC Capital Partners. A change in government-controlled bidding procedures, however, meant that Sinotech was unable to submit an offer in time, so CVC proceeded alone. Other front-runners included a pairing of BC Partners and Cinven.
Some other bidders, uncomfortable with the value, fell by the wayside. "We put so much competitive tension into the first phase that the non-binding offers were pretty rich," says Mr Paquet. "Bidders didn't make tactically lower bids."
The deadline for second phase binding offers was extended to early October, as bidders struggled to digest all the information on Atotech. Carlyle Group had made a non-binding offer which was not among the highest ranges. It upped its game in the second round, however, and won the prize.
"There was a good relationship between the management and Carlyle, and the price was there," says Mr Paquet. Carlyle launched an anti-trust process in the relevant jurisdictions and the deal closed at the end of January, within the timescale required by Total.
At the same time, Barclays led the $2.075bn term loan financing which allowed the acquisition to go ahead. Atotech priced a package that included a $900m seven-year senior secured term loan facility, which was multiple times oversubscribed, a $500m facility sold to Bank of China, to be partially re-denominated into renminbi, and a $250m revolving credit facility. A $425m tranche of eight-year senior unsecured notes was also oversubscribed.
"We aligned all the services of the bank," says Mr Paquet. "Offering stapled financing was instrumental in delivering value and timing to Total. We delivered on time because of the appetite of the buyers. When there is enough appetite from the different buyer baskets, you can drive a competitive process in a tight timeframe."
