Credit Crunch May Freeze M&A

The global credit squeeze that has shaken debt and equity markets during the past few weeks may cool the feverish pace of industry M&A. Banks are left holding debt of about $400 billion in uncompleted management and leveraged buyouts worldwide, according to estimates compiled by Baring Asset Management (London). Several big chemical deals are in that pipeline, including Sabic-GE Plastics, Basell-Lyondell, Hexion-Huntsman, and Carlyle-PQ Corp. Industry deals with committed financing are likely to proceed, say M&A advisers that CW contacted earlier this month. However, the relationship between buyers and their lenders could become tense if banks are stuck with debt they cannot sell on the bond market. That will curtail further lending until banks are able to clear the backlog. Most bankers expect a recovery by early 2008, citing an overall strong economy. “This is a different situation than what has happened in the past,” says Richard Whitney, managing director/chemicals at Credit Suisse (New York). Lenders have clamped down despite low default rates and relatively strong earnings and valuations, Whitney says. “Credit supply and demand is out of balance right now. It is not just in chemicals. It is on a global scale. There are so many large transactions that need financing.” Borrowing costs will rise as lenders demand higher risk premiums, analysts say.
“We think this is more of a correction or pause,” says Ron Kahn, head of the debt private placements group at Lincoln International (Chicago). “If you go back to the last serious credit crunch, back in 2001, it was driven by defaults and bad credits.” But the drivers are different now as defaults are low and earnings strong. “This has nothing to do with the fundamentals. It’s purely a liquidity issue,” Kahn says. Deals already in process are progressing, says Chris Cerimele, senior v.p. at Lincoln International. However, sale processes that were planned or just starting are likely to be delayed until after Labor Day, as buyers and sellers wait for the situation to stabilize. Banks are likely to tighten lending terms going forward, analysts say.
“M&A could be a tale of two cities for each half of the year in 2007,” says Peter Young, president of Young & Partners (New York), an M&A advisory firm. “There are enough announced and completed first-half deals so that 2007 will still be a pretty active year. The second half is going to be tough, however.

Rohm and Haas Loses Taste for Salt

Rohm and Haas (R&H) says it is considering “strategic options” for its salt business, which could include a divestment or spin-off. The company says it expects to make a decision by year-end. R&H’s salt business posted sales of $505 million in first-half 2007, an increase of 19% from the prior-year period. Earnings for the six-month period were $37 million, an increase of 85%, in line with improved sales performance, and offsetting higher operating costs, R&H says. Revenue increased on stronger pricing in the industrial and consumer markets, as well as increased demand for ice-control salt and other bulk products, R&H says. R&H’s salt business accounts for roughly 10% of its revenues and includes the Morton Salt name and trademark, including the image of the Morton Salt umbrella girl, a well-recognized consumer product symbol in North America. Also, R&H will no longer seek to maintain credit ratios consistent with an “A” rating, according to quarterly regulatory filings made late last month. “Rather, we intend to manage our debt levels in a manner consistent with maintaining investment-grade quality ratios,” R&H says in the filings. The company expects to maintain a debt ratio of 50% over the next several years, up from 35% at the end of the second quarter. R&H says it will use cash to: reinvest in core businesses; build new platforms to address growing needs in health, water, energy, and other areas; make selective acquisitions that add new technology or broaden geographic presence; continue to increase dividends; and to repurchase shares. R&H announced plans last month to repurchase up to $2 billion of its common stock, including $1 billion in shares through an accelerated buyback program this quarter that will be funded by the issuance of new debt.