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JPMorgan Leads in Chemical M&A as 2011 to Challenge Record

JPMorgan Chase & Co. (JPM) took the lead in advising on chemical mergers and acquisitions in the first half as 2011 shapes up to be a potential record beater for deals in the $2.5 trillion industry.

The U.S. bank, which replaced last year’s winner Deutsche Bank AG (DBK), advised on five transactions valued at a combined $19.14 billion, according to data compiled by Bloomberg, based on announced takeovers. Credit Suisse Group and UBS AG (UBSN) took the No. 2 and No. 3 slots respectively, followed by Morgan Stanley.

Berkshire Hathaway Inc. (BRK/A)’s $9.22 billion-acquisition of lubricants maker Lubrizol is this year’s biggest deal in an industry that’s drawing interest from buyout firms with renewed access to credit as well as rivals. Cash holdings for the 167 companies in the Bloomberg World Chemicals Index swelled to about $116 billion last year, an increase of 18 percent, as cost cuts coincided with a global recovery.

“Momentum in the deal cycle is upwards,” said Bernd Schneider, a consultant at PricewaterhouseCoopers in Frankfurt, who advises on chemical deals. “2011 will definitely be a great year. It may even become a record year for M&A in chemicals.”

The pace will need to accelerate in the second half to beat the existing $183 billion high of 2007, Bloomberg data shows. In the latest deal to be announced, Lonza Group AG yesterday agreed to buy Arch Chemicals Inc. for $1.2 billion.

JPMorgan’s tally includes working with Mosaic Co. (MOS) when investor Cargill Inc. sold shares in the potash maker and advising DuPont Co. on its takeover of food-additives company Danisco. Among the highest fees published this year is the $26 million paid by Lubrizol to Citigroup Inc. and Evercore Partners Inc. amid the approach by Warren Buffett’s Berkshire Hathaway.

Strategics Lead

The first half saw $60.26 billion in announced deals, an increase of 41 percent. The average transaction size rose similarly, to $271.5 million.

The industry remains largely fragmented industry, Schneider said. The Bloomberg World Chemicals Index has returned 47 percent in a year, double the return of the broader Bloomberg World Index.

“Strategic buyers are taking the lead rather than financial sponsors, reflective of a high level of CEO confidence and the full recovery we have seen in share prices,” said Peter Hall, a partner at chemical adviser Valence Group, which has six deals under its belt in the first six months of 2011. “Based on our pipeline, M&A activity in the sector is set to continue at a high level for the coming months.”

Valence’s transactions include advising Bridgepoint Private Equity Ltd.’s CABB on the purchase of KemFine from 3i Group Plc. Other deals have involved Tessenderlo Chemie NV (TESS)’s disposal of PVC plastic operations to Ineos.

Deal Diversity

“The diversity of these deals and the sectors in which they are involved demonstrate that in the current environment, even relatively ‘difficult’ businesses can be divested such is the appetite amongst buyers,” Hall said. “We’ve managed to deliver one of the first moves in many years in the much-talked- about consolidation of the European PVC sector.”

Disposals have attracted interest from buyers around the world, including China, and targets will get more expensive, said Hall. Higher prices aren’t necessarily a deal breaker as CEOs are increasingly considering the long-term strategic benefit of buying an asset, with less weighting placed on the short-term savings from integrating acquired assets, he said.

During the next 12 months, Hall said he expects to see an increasing number of the emerging-market players, especially in China, gain the confidence to “pull the trigger” on acquisitions, particularly where the target has world-leading technology that can be applied in the domestic Chinese market.

Multiples

“The multiples they have in some instances paid must be evaluated against a backdrop of there being no immediate synergy - so they have demonstrated their willingness to pay a market entry multiple,” Hall said.

Demand is coinciding with an expected increase in the number of assets that are poised to be sold by private equity firms, said Schneider.

“There are a lot of assets around held by private equity for five years or more, some of them are overdue for an exit,” consultant Schneider said. “Private equity investors need to act now, and many assets are being prepared for a sale. Some private equity investors seem to be under pressure to invest. They are hungry for assets.”

To contact the reporter on this story: Richard Weiss in Frankfurt at rweiss5@bloomberg.net.

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net.

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