KBS - Chemical Manufacturing and Development - Market Insight

MARKET INSIGHT – CHEMICAL MANUFACTURING AND DEVELOPMENT

MARKET INSIGHT • Chemicals and pharmaceuticals is one of the largest industries in the UK. In 2023, chemical industry revenues in the UK stood at £62bn, with a GVA (gross value added) of £30.4bn. The UK also plays a big role in the European chemical market, being one of the countries with the largest chemical revenue throughout the continent.

• In 2022, the value of chemicals exported by the UK to the United States amounted to nearly $12bn, making the US the UK’s largest trade partner for chemical exports.

• Chemical manufacturing can be found in all regions of the UK, but the industry is most prevalent in the north. The main chemical sites are in Scotland, Teesside, Humberside and the North West of England.

• Product segmentation:

• Basic chemicals (commodities): 35–37% of output • Life sciences: 30% • Speciality chemicals: 20–25% • Consumer chemicals: 10%

• The UK chemical sector has been adaptable. However, it faces competition and import costs post-Brexit, as well as energy cost concerns.

• UK companies with niche specialities are attractive targets for international buyers, and UK-based private equity remains very active in the mid-market. The deal flow may be driven by industrial policy, e.g. incentives for green manufacturing and by the necessity for UK firms to scale up to compete globally. • The Chemical Industries Association in the UK has highlighted the need for investment to meet net-zero targets, which will translate into both M&A and joint ventures. Moreover, cross-border deals are expected to rise as overseas buyers seek footholds in the UK’s speciality chemicals such as lithium and battery material start-ups.

In 2023, chemical industry revenues in the UK stood at £62bn , with a GVA (gross value added) of £30.4bn.

FACTORS DRIVING GROWTH

SPECIALISATION A driver of growth in the chemical industry is the innovation and specialisation offered by firms. UK companies have been investing significantly in R&D, which has led to world-leading specialisations. For example, catalysts (Johnson Matthey), speciality surfactants and personal care active ingredients (Croda), advanced composite materials, and cutting-edge biotech applications. Developing unique products with superior performance allows chemical firms to export their products (see graph below) and command premium prices. This can be seen by the strong performance of specialities and food-chemicals sub-sectors which enjoy higher pricing power and continuous demand.

The need for advanced materials such as nanotech-enhanced polymers and high-performance composites is also introducing new applications in sectors such as electronics, healthcare and automotive.

Exports of chemical products as a percentage of total UK exports

950,000

15%

Total UK Exports (all industries) Chemical as a % of total exports - rhs

850,000

13%

750,000

11%

650,000

9%

550,000

7%

450,000

5%

350,000

3%

250,000

1%

2011

2021

2013

2017

2015

2012

2014

2016

2019

2018

2010

2023

2022

2020

2008

2009

SOURCE: Refinitiv Eikon Datastream, Allianz Research

TECHNOLOGY Adoption of digitisation, AI, IoT technologies and Industry 4.0 frameworks is transforming the chemical sector. Companies are finding novel compounds faster, which accelerates product launches and opens new revenue streams. AI is being utilised in drug molecule design, benefitting chemical suppliers to pharma and optimising chemical processes through reducing costs and enabling scale-up of new products. Moreover, an AI-driven discovery platform such as Recursion offers an 18-month timeline vs the 42-month industry average. SUSTAINABILITY Environmental and sustainability factors are propelling growth, by way of opening new markets and attracting investment. The push for net-zero and greener products means chemical companies are developing and selling more bio-based and sustainable chemicals. Globally, there is rising demand for biopolymers, biodegradable packaging and sustainable ingredients. UK firms are at the forefront in these sub-sectors, e.g. Croda’s bio-based surfactants or renewably sourced materials from Synthomer.

The green chemicals market has grown nearly tenfold, from $11bn in 2015 to $100bn in the mid-2020s.

M&A ACTIVITY IS RISING IN THE CHEMICALS INDUSTRY

Chemicals industry M&A activity: Total deal value of deals globally ($bn)

Small and mid-size deals ($5m

Large deals ($1bn deal value)

300

250

Average = $161bn

200

150

Average = $90bn

224

234

100

151

86

77

72

73

57

50

60

20 53

32

37

28

31

26

28

26

21

23

24

25

-

2014 2015 2016 2017 2018 2019 2020 2021

2022 2023 2024

SOURCE: Mergermarket, Natrium Capital. Note: Excludes lapsed deals and deals in China

Since Q2 2023, deal value in the chemical industry has been steadily climbing. This sector, along with most others, suffered during the COVID-19 pandemic and the chemicals M&A market remained turbulent through to Q1 2023.

There was a resurgence from Q2 2023, indicating momentum as conditions stabilised. Interest rates also largely stabilised in 2023, despite remaining comparatively high, leading to 148 global deals in the speciality chemicals sector being completed in H2 2024 – nine more than the long-term average. Total deal value for H2 2024 reached $13.9bn, representing a 113% increase from H1 2024. H2 2024 also saw an uptick in high-value transactions. Although smaller deals, less than £75m, were the most prominent, the rise in deal values indicates companies and investors are committing to larger investments into the chemical industry.

SECTOR DEFINITION The chemical manufacturing and development sector consists of companies engaged in the research, scale-up, production and supply of chemicals, intermediates and formulations for industrial and consumer markets. This includes fine chemicals, speciality chemicals, active pharmaceutical ingredients (APIs), agrochemicals, polymers, advanced materials and contract/toll manufacturing services. The sector serves industries such as pharmaceuticals, life sciences, agriculture, automotive, construction, electronics, consumer goods and energy. It is driven by global megatrends such as the demand for sustainable and bio-based chemicals, stricter environmental regulations (e.g., REACH, EPA and ESG standards), digitalisation of chemical processes, and supply chain security. Innovations in green chemistry, continuous manufacturing and advanced materials (e.g. battery chemicals, composites) are shaping the sector’s future. The push towards decarbonisation, circular economy practices and safer, higher-value speciality products is also influencing investment and customer demand.

CURRENT TRENDS • Many firms have shifted focus to the pursuit of smaller acquisitions or bolt-on opportunities, rather than transformational deals, with economic uncertainty, tariff changes and interest rates all contributing to this. Notably, eight of the top 15 deals in 2023 were driven by consolidation or vertical integration motives for scale and supply-chain resilience. • M&A in the chemicals industry tends to follow sub-sector themes. After years of diversifying by large multinationals, there is a countertrend of portfolio focus and segment level consolidation. For example, recent years saw deal activity in agrochemicals, coatings and pigments, followed by a rise in deals for flavours, fragrances, cosmetics and personal care. Firms will continue to acquire with the aim of becoming leaders in particular sub-sectors, seeking synergies and consolidating their diversified portfolios. • Innovation and technology are key drivers for M&A in the chemicals industry. Recent transactions have been catalysed by the need for new capabilities, such as speciality chemical firms buying tech start-ups or labs to gain proprietary processes, advanced materials or AI-driven research platforms. In 2023, a notable number of deals were motivated by access to new IP, patents and R&D talent in chemicals. Larger companies, for example Recursion’s acquisition of Exscientia, have acquired AI-focused drug and materials discovery firms.

In 2022, the value of chemicals exported by the UK to the United States amounted to nearly $12bn, making the US the UK’s largest trade partner for chemical exports.

KEY DRIVERS AND MOTIVATIONS FOR ACQUIRERS

Trade buyers have been acquiring mid-sized speciality chemical players with strong IP, loyal customer bases and advanced R&D capabilities.

There has been a focus on high value and cross-border acquisitions across Europe and the US since 2024. Firms are looking to develop sustainability through acquisitions, for example by improving their formulations or by introducing low-carbon manufacturing. Moreover, companies which leverage digital tools for production efficiency, supply chain resilience or customer personalisation often receive higher valuations.

Finally, acquirers aim to vertically integrate, controlling more of their supply chains and routes to markets.

FACTORS DRIVING BUYER APPETITE AND DEAL VALUES

In the chemicals sector, we have seen deal values that have been calculated on adjusted EBITDA/earnings multiples ranging from 5/6x to double-digit figures, depending on various factors such as recurring and contracted revenue, vertical specialisation, strategic positioning and scalability.

Key factors that can influence the value have included:

• Healthy sector multiples have been indicative of a flight to quality assets, where companies with resilient margin profiles have commanded high valuations. This has kept sector multiples elevated.

• Chemical firms serving fast-growing end-user industries tend to achieve higher EBITDA multiples. Acquirers pursue targets that supply into industries such as life sciences, pharma and EVs. Similarly, chemical companies enabling battery technology, sustainable packaging or high-tech electronics are drawing premium prices. • Acquirers often place higher valuations on significant synergies or scale benefits in a deal. In chemicals, cost synergies such as combining plants or distribution networks and revenue synergies, e.g. cross-selling products, global market access, can be substantial. • ESG-oriented assets in the chemical sector are commanding higher multiples, driven by both regulatory trends and investor appetite for sustainable businesses. In the UK and Europe especially, deals that further an ESG agenda - for example acquiring a recycler, a bio-based chemicals producer or a firm with low-carbon processes - often see valuation uplifts relative to traditional chemical assets. Strategic acquirers are willing to pay a premium to acquire capabilities that help meet carbon reduction targets or appeal to environmentally conscious customers. Sika’s $6bn purchase of MBCC in 2022 is illustrative, as it was justified in part by the goal of becoming a ‘sustainability champion’ in construction chemicals. With global climate goals, many chemical companies see buying innovative sustainable-tech firms as faster than building in-house, and therefore pay premium prices.

M&A INTEREST FROM ACQUIRERS AND INVESTMENT ROUTES Private equity has been heavily investing in high-growth sub-sectors of the chemicals industry, such as speciality chemicals. PE is drawn to these types of companies due to their tailored offerings - end users are often in diverse, high-growth end markets and yield higher margins. Recent acquisitions highlight these interests. Trade buyers seek to divest non-core assets whereas PE has been focusing on niche innovators, aiming to expand their portfolios, drive operational efficiency and leverage growth through bolt-on acquisitions.

KEY ACQUIRERS AND INVESTORS Major players in this sector include

SPECIALITIES Strategic acquirers are pursuing speciality chemical businesses, particularly those with high margins and niche market leadership. These include firms in sub-sectors such as flavours and fragrances, food additives, personal care ingredients, nutraceuticals, and speciality coatings. There has been a wave of investments into these sub categories. For example, Firmenich International SA (fragrance) merged with DSM (nutrition) to establish DSM Firmenich AG, a leader in perfumes and food ingredients. TECHNOLOGY Chemical firms are acquiring service-oriented businesses or digital platforms. This includes speciality chemical distributors for better market reach and data analytics/software firms that enhance operations. For example, global distributors such as Brenntag and Azelis have been acquiring smaller speciality distributors to broaden their product range and customer base. Moreover, firms have shown interest in acquiring specialists that utilise AI for chemical formulation or platforms that connect producers with customers more efficiently, for example UK company Croda has acquired biotech and tech-driven firms, from marine biotechnology to encapsulation tech, to develop its pipeline.

Total deal value for H2 2024 reached $13.9bn, representing a 113% increase from H1 2024.

M&A ACTIVITY IN THE CHEMICALS SECTOR

AVOCET DYE AND CHEMICAL ACQUIRED BY JOHN HOGG TECHNICAL SOLUTIONS

KBS DEAL

Yorkshire-based Avocet, one of the UK’s leading manufacturers of dyes, flame retardants and textile auxiliaries, was sold to John Hogg in a deal which expanded the Manchester company’s market reach in the speciality dye and chemical business segment.

RAVAGO CHEMICALS ACQUIRED MAJORITY STAKE IN CEDA CHEMICALS

Part of the world’s largest polymer distribution group which has over 50 manufacturing facilities, Ravago Chemicals acquired a majority stake in Ceda, a leading UK speciality chemical distributor focused on a broad range of commercial markets.

CAR-CHEM ACQUIRED BY LEADING SOLVENT SUPPLIES

KBS DEAL

Car-Chem, an award-winning Nottingham-based manufacturer and international distributor of vehicle care products, was sold to Leading Solvent Supplies, a major manufacturer and distributor of solvents and chemicals used in a variety of sectors.

MONARCH CHEMICALS ACQUIRED BY BRENNTAG

Monarch, one of the UK’s leading distributors of commodity chemicals and renowned for its in-house liquid and powder blending facilities, was acquired by Brenntag Essentials, the global market leader in chemicals and ingredients distribution.

CHANTRY CHEMICALS ACQUIRED BY WHITE SEA & BALTIC CO

KBS DEAL

Chantry, provider of a bespoke chemical and raw materials distribution service to the paint, printing inks, surface coatings, janitorial, lubricants, plastics and sealants industries, was sold to White Sea & Baltic, a leading speciality chemicals distributor.

WHITCHEM ACQUIRED BY AZELIS UK

WhitChem, a well-regarded distributor focused on CASE (Coatings, Adhesives, Sealants and Elastomers) and AM&A (Advanced Materials & Additives), was acquired by Azelis to reinforce its position in the UK industrial chemicals market.

CLOVER CHEMICALS ACQUIRED BY CHRISTEYNS

KBS DEAL

Clover, a Derbyshire-based developer and manufacturer of high-quality cleaning chemicals, was sold to Christeyns, a hygiene solutions specialist for sectors including professional textile care, food processing & retail, and medical and life sciences.

PRIVATE EQUITY TRANSACTIONS

Leading global private investment firm Bain acquired Porus Labs, a leading manufacturer of agricultural and speciality chemicals founded in 1994 and based in Hyderabad. Porus Labs specialises in polymers, electronic chemicals and agrochemicals. PORUS LAB ACQUIRED BY BAIN CAPITAL

BRIAR CHEMICALS ACQUIRED BY SAFEX CHEMICALS, BACKED BY CHRYSCAPITAL

Norwich-based Briar, the UK’s leading agrochemicals Contract Development and Manu-facturing Organisation (CDMO) provider, became the first overseas acquisition by leading Indian agrochemicals company Safex, backed by private equity firm ChrysCapital.

TriStar, a leading provider of engineered plastic solutions and self-lubricating bearings, was acquired by Sky Peak, an operationally driven investment firm focused on building long term partnerships with founder-led, lower middle market industrial businesses. TRISTAR PLASTICS ACQUIRED BY SKY PEAK CAPITAL

F2, based near Preston and a leading UK chemical products manufacturer, was acquired for an undisclosed sum by London-based growth investor Rcapital, in a corporate carve out from its listed Japanese parent, Reasonac Corporation. F2 CHEMICALS ACQUIRED BY RCAPITAL

Middle-market PE firm Gemspring announced it has entered into a definitive agreement to acquirer Goodyear Chemical, a leading producer of synthetic rubber used in a broad array of products including tyres, with the transaction expected to close before the end of 2025. GOODYEAR CHEMICAL TO BE ACQUIRED BY GEMSPRING

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