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Tide may be turning for risky European chemicals sector, survey finds

Despite the substantial amount of private equity that has been invested in European chemicals companies in recent years, the industry remains divided as to the long-term appeal of the sector. Only 22 out of 94 major European chemicals investments in the last decade have led to a successful exit. But the tide may now be turning, according to research produced by Ernst & Young.

Recent estimates have suggested that up to E10bn of the European chemicals sector's assets are up for sale with up to 40 per cent of these going to private equity buyers. But over the past ten years, European private equity acquisitions in chemicals have consistently outstripped the number of exits taking place.

Ernst & Young's own survey of private equity firms who had made 94 major investments totalling more than E35m in the chemical sector since 1994 revealed some mixed experiences. Respondents cited special features of the chemicals sector that added to its complexity and felt that the sector should be approached with caution. But despite the risks, 80 per cent of interviewees indicated either a strong or continued interest in the sector.

'There is generally steady rather than spectacular growth in the sector and when you combine that with the high capital intensiveness required in some segments, the volatility of the supply of raw materials, the currency risk in a highly international market, as well as environmental and regulatory issues it is significant that so many firms invested and continue to invest in the industry,' said Jonathan Bourne, chemicals sector leader at Ernst & Young.

Of those respondents with mixed or negative feelings, some have struggled to make adequate returns, compounded in a number of cases by difficulty in achieving exits. But as Bourne explains the tide may now be turning.

'In terms of transactions it has undoubtedly been a buyers' market until quite recently and there have been relatively few exits via the IPO route,' he commented. 'There remains a challenge to achieve full value as we see companies beginning to put less emphasis on operational efficiencies and more on technology and growth via acquisition, the opportunity of a good trade sale may become more likely.'

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