The adhesives and sealants sector is a hot area for mergers and acquisitions, attracting both strategic and private equity buyers. The time for consolidation is now
Hopes are high for the chemical mergers and acquisitions (M&A) market overall and the adhesives, sealants, coatings and elastomers sector in particular. "The outlook for M&A in this sector remains positive, but rather focused as companies buy select assets with the technologies that fit their business," says John Televantos, partner at US-based private equity firm Arsenal Capital Partners and co-head of its specialty industrials group.
"It is a very fragmented market with many companies with less than $50m [€39m] in annual revenue." These owners typically decide for their own personal reasons when to sell, and sales of these assets will continue, he notes. "Companies with adhesives and sealants platforms such as Arsenal will look for these kinds of deals. We expect to close one or two more of these deals in 2013."
ARSENAL TARGETS DEALS
Arsenal has been on a tear, buying up five companies in 2012. In December, it acquired US resins producer Adhesive Packaging Specialties (APS) for an undisclosed sum. APS packages component adhesives, sealants and resins for the aerospace, automotive, IT, construction, electronics and telecom sectors.
"APS fits well with our strategy and provides a strong platform for us to develop a larger and more geographically diverse custom packaging business that serves the domestic and international adhesives and sealant industry," said Televantos at the time of the deal.
Later in December, it bought out US formulated polyurethane (PU), vinyl plastisol and specialty coatings manufacturer Dash Multi-Corp.
Arsenal is building a technology centre in North Carolina, US, and expanding its ultraviolet resin production capacity in the Americas after buying Netherlands-based IGM Resins.IGM Resins, with annual sales of over $150m, produces formulated materials for the coatings, adhesives and ink markets. The ultraviolet radiation-cured formulations are solvent free and release few emissions.
They are also energy efficient and have rapid curing speed, which is required for applications such as fibre-optic cable, smart phone exterior clear coats, electronic part coatings, clear packaging protective coatings, ticket laminating adhesives/coatings and automotive parts protective coatings.
IGM Resins has offices and production facilities in Europe, the US, South America and China. Annually it consumes millions of pounds of acrylic, epoxy and urethane monomers and polymers as raw materials.
RATIONALE FOR ROLL-UPS
Televantos aims to develop an adhesives, sealants and coatings platform for three key reasons. "First, it is a fragmented market, which allows us to have a roll-up play in the sector starting with a platform and building on it with new technologies," he explains.
Second, the adhesives sector in particular is still growing faster than GDP since these materials replace traditional fasteners such as screws and nails. The process of applying the materials is easier to automate, and the performance and aesthetics tend to be improved.
"Lastly, these are businesses that have great customer intimacy with a service component. Here you can be less worried about foreign imports that will displace your products. They are also not very capital intensive businesses with good cash conversion," adds Televantos.
"Private equity loves the steady cash flows of formulated chemistries, including adhesives," says John Beagle, co-founder and head of the chemical practice of US-based investment bank Grace Matthews. "They are fairly predictable and also the businesses have low CAPX [capital expenditure] requirements."
Arsenal bought its platform business - US-based Royal Adhesives & Sealants - from fellow private equity firm Quad-C Management in November 2010. Its products included thermosetting epoxy and urethane, as well as solvent-based and water-based materials serving a diverse range of markets including aerospace and defence, construction, specialty packaging, automotive and industrial.
A month later in December 2010, it acquired US-based specialty adhesives, coatings and polymers firm Para-Chem in a process that actually began before the Royal Adhesives deal, Televantos explains. Since then it has added three more acquisitions to the platform.
Arsenal prefers to seek out reactive, and less solvent-based adhesives companies with a higher technology content. Ultimately, it expects to roll these assets into one stronger holding company and eventually sell to a strategic or another financial buyer, says Televantos. Larger deals in the sector take place less frequently, as these assets are not always available, he notes.
One major success story on the large deal front thus far has been US-based H.B. Fuller's acquisition of the industrial adhesives business of Switzerland-based Forbo in March 2012 for Swfr 370m ($394m).
"We are pretty much done integrating Forbo in the Americas and are in the middle of the process in EMEA [Europe, Middle East, Asia]. It is going extremely well," says Pat Trippel, senior vice president of innovation and market development at Fuller. "Forbo had an automotive adhesives business primarily in Europe, but we were able to take advantage of our scale and globalise it across the Americas and Asia."
Within the highly fragmented global adhesives market, where Henkel is number one at around 25% market share and Fuller is number two at about 5%, "there will be a continuing trend of consolidation", he notes.
FULLER M&A FOCUS
Fuller employs M&A as a key part of its growth strategy. "We focus on our strategic plan and core adhesives markets in non-wovens, packaging and durable assembly. We evaluate strengths and weakness in these areas - both product-wise and geography - and try to fill in the gaps," says Trippel.
In the $40bn global adhesives market, consisting of 80 different segments, Fuller sees the most opportunity in durable assembly. In September 2012, it acquired US-based Energent - a provider of manufacturing and research and development (R&D) services to the electronics industry - to enhance its presence in the electronics adhesives market.
"The durable assembly market is quite fragmented with a lot of subsegments such as electronics. This is one business we would like to participate in more. The Energent acquisition added important application knowledge for us," says Trippel. "We have a relatively small business in electronics adhesives but intend to be a bigger player." The electronics adhesives market is valued at around $3bn, and is growing at over 10% annually with the majority of the market in China, notes Trippel.
Fuller aims to boost its presence in emerging markets, seeking organic growth and acquisition opportunities in Asia, Latin America, the Middle East, and Central and Eastern Europe, he notes.
THE TIME IS NOW
"The time for consolidation is now. Being bigger has never been as important with the benefits of scale in technology, raw material purchasing and distribution channels, as well as the growing costs of global regulatory compliance," says Grace Matthews' Beagle.
Acquisitions by large companies will continue to be focused as they seek to fill niches in technologies or geographies, he adds.
The banker is "very optimistic" on the outlook for M&A activity in the adhesives and sealants sector for 2013.
"The balance sheets of the big adhesives companies are incredibly strong. They are also publicly traded companies that are under pressure to grow," says Beagle. "They are printing money now and have high cash and low debt levels. They will put the cash to use with dividends and acquisitions."
And acquisitions of formulated chemical producers such as those in adhesives tend to be low risk, he notes. "For almost every small to mid-sized deal, you have plenty of cost savings opportunities, ranging from plant closures, raw material purchasing to management duplication. There is an incredible safety net for a deal."
An attractive adhesives acquisition candidate will tend to be end-market focused with technology advantages. "A strategic acquirer thinks in terms of markets, whether it's electronics, packaging or construction," he adds. Right now, valuations are robust for quality adhesives and sealants assets, making for a seller's market, says the banker.
"There is a scarcity of targets, while both strategic and financial buyers are under pressure to put money to work. In addition, almost every deal today is shopped or threatened to be shopped," says Beagle. "Gone are the days when a large buyer takes advantage of an uninformed seller at a low price."
He estimates high quality specialty adhesives assets can fetch eight to 10 times earnings before interest, tax, depreciation and amortisation (EBITDA).
OVERALL VALUATIONS
The overall global specialty chemical median multiple of total enterprise value (TEV) to EBITDA multiple for closed deals in 2012 was 10.4 times, down slightly from a record 10.7 times in 2011, notes Allan Benton, vice chairman and head of the chemical industry practice at US-based investment bank Scott-Macon.
Commodity chemical assets fetched a median EBITDA multiple of 8.6 times in 2012 - up from 6.5 times in 2011.
"While the volume of activity was down in 2012 for both commodity and specialty chemical deals, valuations held up quite well," says Benton. "As long as earnings are good and margins are high, I don't see any abrupt decline in valuations in the near term."
Prospects are favourable for the coatings, adhesives and sealants sector - both in profitability and consolidation potential, he says.
"There is a strong pick-up in new home construction in the US, and we expect companies selling products into the home building sector to do well," says Benton. "And despite the fact that there are large companies in this sector, there are also many smaller companies. There is certainly room for more consolidation."