Chemical M&A set for major rebound in 2010-US analyst

NEW YORK, April 26 -Chemical industry merger and acquisition (M&A) activity is set for a major rebound in 2010, driven by pent-up demand from cash-rich companies, a US analyst said on Monday.

Strategic buyers, armed with balance sheets flush with cash, are seeking ways to accelerate growth beyond their organic means, said BB&T analyst Frank Mitsch in a research note.

The amount of cash on the balance sheets of 15 US chemical companies under coverage by BB&T (excluding Dow and DuPont) reached a decade-high of $8.3bn (?.2bn) in 2009 - 60% above 2008 levels, the analyst noted.

With many players on the sidelines in 2009, we believe there is notable pent-up demand that is just waiting to be executed on in 2010, said Mitsch.

With consolidation a key driver of M&A activity, companies in the fragmented markets of coatings and adhesives - such as Valspar, RPM International and HB Fuller - could appear on radar screens of buyers, he noted.

In addition, companies emerging from bankruptcy such as Chemtura, WR Grace, LyondellBasell, Solutia and Tronox could be potential targets, along with companies with focused portfolios such as Arch Chemical and Nalco (both in water treatment), the analyst added.

Leveraged buyouts (LBOs), which disappeared in 2009, could also be on the comeback, noted Mistch.

As earnings have elevated from the abysmal 2008 to early 2009 levels, private equity firms are increasingly able to justify valuation multiples, he said.

Mitsch said his top LBO candidate was US-based phosphates company Innophos. A buyout could be feasible at nearly twice the company s current share price of around $30 based on various cash flow metrics, he said.

Other LBO candidates included Eastman Chemical and PolyOne, said Mitsch.
($1 = ?.75)