Also private equity funds are now taking the opportunity to offload investments in the sector, which they made before the recession.
The vast majority of M&A activity involves suppliers of coatings materials but analysts believe that the increase in takeovers will soon spread to coatings producers themselves because of a general need within the European coatings industry for restructuring.
In particular companies see a necessity to build up the strength of their core operations not only in their mainly Western European domestic markets but also in the high growth economies of Asia, Latin America and Eastern Europe.
Although a major driver behind M&A deals is consolidation, another big impetus is a requirement to gain access to raw materials at a time of rising costs of some bulk and specialty chemical ingredients.
“Availability of reasonably priced raw materials is now a major preoccupation of coating companies and their suppliers,” said an official at one European trade association representing coatings companies as well as other downstream chemical users. “They are worried not just about raw material costs but also about the prevalence of shortages. These difficulties with raw materials are influencing longer term strategies.”
Acquisition of companies with access to key raw materials is one way of easing the problem. Another option is to use takeovers to build up vertically integrated operations to enable companies to have full control of the production of raw materials as well as of the downstream manufacture of products in which they are used.
The main objectives of two of the latest major acquisitions in the coatings sector—the sale of PolymerLatex of Germany by the equity fund TowerBrook Capital to Yule Catto of the UK and the purchase by France’s Arkema of Total’s coating resins businesses—have been consolidation to expand core operations.
“(Yule Catto’s acquisition) represents another example of the recent pick-up of both UK and continental European M&A activity,” said Martin Shaw, a senior executive at the international law firm Pinsent Masons, which is handling the takeover for the UK-based company.
However for Arkema, which is both a petrochemicals and specialty chemicals producer, the aim of the resins acquisition was not only consolidation but also to establish a leading global coating materials business which would be backward integrated into raw materials.
The French company, which itself was a spin-off from Total in 2006, is paying €550 million ($748 million) for the coatings resins businesses of Total’s Cray Valley and Cook Composite Polymers (CCP) and the photocure resins operations of Sartomer.
The businesses have total sales of €850 million and employ 1,750 people in 13 countries on 20 sites around the world.
Sartomer makes acrylic esters and epoxy, urethane and polyester acrylates for resins with high-curing speeds and 100 percent dry content for applications in industrial and wood coatings, graphic arts and electronics. Sartomer’s primary global competitor is Cytec.
The main markets for Cray Valley’s resins are architectural, coil, can, marine and protective coatings as well as resins for adhesives and sealants. It also has a big position in rheological additives.
Through its resins activities, Total has been among the top five producers in the global coatings sector for solventborne, powder and photocure resins.
These businesses are being merged with Arkema’s own coatings operations in which it has a global leading position in specialty emulsions, fluoropolymer binders sold under the brand name Kynar and in rheology additives through its Coatex business, which it acquired in 2007. It also has a strong position in glass coatings through its subsidiary Altuglas.
As a result of the Total acquisition, Arkema now has a relatively strong position in coatings materials in the three major regions of Europe, North America and Asia, whereas previously it had no coatings production facilities in Asia.
Above all with many of the resins being acrylic, the operation will be highly integrated into Arkema’s own production of acrylic acids. In Carling in northeast France, the company has a petrochemicals site dedicated to the production of raw materials for acrylic-based products.
Worldwide Arkema is a leading producer of acrylic monomers. With the Total takeover its acrylic downstream integration will be increased to 40 percent.
As a result it will be a much more powerful rival to other integrated producers of coatings materials, led by BASF and Dow Chemical. But its vertical integration will also give it a competitive advantage over other non-integrated suppliers to coatings formulators at a time of increasing raw material scarcities.
Yule Catto’s takeover of PolymerLatex, which was set up as a merger 15 years ago of the latex businesses of Bayer and the former Huels and Roehm companies of Germany, will bolster the operations of the UK company in Asia.
Under the ownership of TowerBrook over the last eight years PolymerLatex has reinforced its position in Europe where it is the third largest latex producer and has expanded into the Middle East and Asia.
The acquisition which has a total transaction value of €443 million, including the assumption of debt of €286 million will increase Yule Catto’s total polymer chemicals sales by €386 million to approximately €760 million, much of its comprising emulsion polymers for coatings and adhesives as well as for products like latex gloves. Already before the takeover polymer chemicals accounted for approximately 85 percent of Yule Catto’s revenue.
“(The acquisition of PolymerLatex) creates a group with increased scale, an enhanced product portfolio, stronger market position and greater efficiencies, all of which provide a foundation from which to grow and compete more effectively in a consolidating emulsion polymers market,” said Adrian Whitfield, Yule Catto’s chief executive.
“At the same time it supports our long-term strategy by providing a stronger platform and the necessary cash generation to accelerate our growth in emerging markets,” he said.
Meanwhile among coatings producers, the biggest recent acquisition in Europe has been that of the UK plastic coatings specialist Sonneborn & Rieck by Fujikura Kasei of Japan.
The Japanese company has now taken 100 percent control of a tripartite alliance of itself Sonneborn & Rieck and Red Spot Paint & Varnish Co. Inc of the U.S., which it acquired three years ago. The three have pooled their production, marketing and R&D operations to create a worldwide venture.
“With all three companies now under one roof, (they) form a sustainable strategic business model to serve customers on a global basis,” said Shigeru Takehashi, chief executive of Fujichem Sonneborn, the newly named UK subsidiary.
Coatings producers in Europe are likely now to have to go through a period of consolidation to match the restructuring already started by suppliers of coating materials. Otherwise they run the risk of losing bargaining power within the coatings supply chain.