ICIS Chemical Business Reveals the US Debt Crisis Jeopardizes Chemical M&A Market
New York,NY - ICIS Chemical Business magazine has uncovered the extent to which the growing US debt market crisis has slammed the brakes on the white-hot global chemical mergers and acquisitions (M&A) market.
"What started with higher defaults in US sub-prime residential mortgages has now spread to the wider credit market, choking off capital to finance deals," says Joseph Chang, global editor of ICIS Chemical Business.
"The debt issuance crisis that developed in July will have a significant impact on all M&A activities in the second half of 2007, but in particular the activities of the private equity buyers," says Peter Young, president of New York-based investment bank Young & Partners. "This will really stop the show - some deals may not go through and others won't be announced."
Private equity players had a strong first half of 2007, capturing 28% of the total number of deals and 36% of the dollar volume - up sharply from 15% and 17%, respectively in 2006, according to Young & Partners. Private equity buyers accounted for five of the top 10 deals in the first half.
"One major impact will be on the level of leverage companies will be able to take on in a deal," says Telly Zachariades, global head of chemicals at Bear Stearns. "You might still be able to get transactions done, but they won't be able to take on as much debt. That will bring M&A valuations down, which may result in a potential seller not being willing to sell."
Where many buyers were able to get an average of 6-7 times earnings before interest, taxes, depreciation and amortization (EBITDA) in debt financing before mid-July, they will now only be likely to get 5-6 times - if at all, says Zachariades.
The middle market, for deals under US$500m (EUR366m) in size, is also affected, but to a lesser extent, notes Jean Cayanni, senior managing director at Cosa Mesa, California-based investment bank RSM EquiCo.
"The leverage available will go down a bit - from an average of 4 times EBITDA or more, to about 3-3.5 times," he says. "That will have a negative impact on M&A valuations if private equity firms do not increase their percentage of equity. However, this is not likely to happen, given the abundance of funds they need to put to work."
Private Equity Casualties The debt crisis will throw cold water on new M&A activity.
"2007 will prove to be a two-act play with dramatically different acts, due to the severe debt and liquidity crisis," says Young. "The debt crisis that started in the mortgage market has thrown a high degree of uncertainty around many of these deals. The biggest potential casualties are the
private equity deals that depend heavily on debt financing and in particular, high-yield public debt."
"It will be a bold move for anyone to kick off a sale process over the next few months, particularly if the predominant buyer universe is financial," says Bear Stearns' Zachariades. "There is clearly an opportunity for corporate buyers with existing unutilized credit lines, or more readily available access to credit, to regain the upper hand, at least temporarily, from the private equity community."
SOURCE: ICIS Chemical Business magazine