Evonik Picks Top-Priced Targets in Chemical Deals Hunt: Real M&A
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Nov. 3 (Bloomberg) — Evonik Industries AG may find it’s tough to be a buyer in a seller’s market.
Royal DSM NV, Clariant AG and Croda International Plc have made the German chemical maker’s short list as it seeks a large European takeover target, according to people familiar with the matter. Despite the companies’ lackluster returns this year, all three still trade at a premium to the median profit multiple paid for recent chemicals deals, according to data compiled by Bloomberg.
European chemical companies have gotten more expensive over the last three years, with an index of 25 companies including Clariant, Croda and DSM reaching a peak valuation in July. Symrise AG, which makes flavors and fragrances, is even more expensive than the other targets, but would best fill the holes in Evonik’s portfolio, according to DZ Bank AG. If the valuation is too high, Clariant looks better than DSM because it’s half the size.
“It’s a good time for the sellers, but it’s not a good time for the buyers,” Peter Spengler, a Frankfurt-based analyst at DZ Bank, said in a phone interview. “It’s not peak valuation now but it’s a little bit below peak.”
Evonik’s Revamp
Evonik is looking for deals that will help it expand into less volatile, higher-margin businesses, after sales declined. The company has been reorganizing to decrease sensitivity to price swings.
Chief Financial Officer Ute Wolf said last month that the Essen-based company has the resources to execute a “sizeable” acquisition. Evonik will focus on deals that strengthen the consumer, health and nutrition unit and the resource efficiency division.
The maker of cosmetic ingredients is talking with advisers about a potential deal with DSM and also evaluating companies such as Croda and Clariant, according to people familiar with the matter, who asked not to be identified because discussions are private.
Even before accounting for a takeover premium, those three targets are already expensive by some measures. They trade at an average of 10.2 times earnings before interest, taxes, depreciation and amortization. In the last five years, buyers paid a median profit multiple of 8.8 for chemical companies in deals larger than $1 billion, according to data compiled by Bloomberg.
Clariant on Top
Among those three, Clariant “would be the best potential target,” based on its size and what Evonik can afford, said Spengler of DZ Bank. Clariant has the lowest profit multiple of the three, trading at 9.1 times its Ebitda in the last year.
Clariant Chief Executive Officer Hariolf Kottmann has revamped the company, which makes petrochemical catalysts and shampoo ingredients, to improve profitability and focus more on less-volatile specialty chemicals. Analysts project that net income will rise next year to the highest level in more than a decade and that free cash flow will jump to more than $400 million by 2016, according to data compiled by Bloomberg.
“Clariant really stands out,” Brian Hennessey, a fund manager at Purchase, New York-based Alpine Woods Capital Investors LLC, which oversees about $4.5 billion including Clariant shares, said in a phone interview. The $5.8 billion company will have “good free cash flow generation and a product portfolio that’s defensively oriented but with still decent growth.”
Symrise, which makes perfume oils and flavors for ice cream and snack food, would be an ideal supplement to Evonik, said Spengler of DZ Bank. Its operating margin, at 16 percent, is about double Evonik’s. The only problem is Symrise is even more expensive, with an Ebitda multiple of 15.
Go Small
Evonik will probably focus on niche acquisitions instead, said Ronald Koehler, a Frankfurt-based analyst at MainFirst Bank AG. That makes more strategic sense than a transformational takeover of a conglomerate such as DSM, he said. Those kinds of deals may also be cheaper.
“It’s potentially not the best time, but the industry is thinking differently than portfolio managers,” Koehler said in a phone interview. “They’re buying when they have cash and they definitely right now have cash. At the end of the day, it’s also availability, which is necessary.”
To contact the reporter on this story: Brooke Sutherland in New York at bsutherland7@bloomberg.net To contact the editors responsible for this story: Beth Williams at bewilliams@bloomberg.net Whitney Kisling
