ILMA Compoundings June 2018 - 18

INDUSTRY RUNDOWN

Market Report
M&A Markets Cut Through the Noise
Mergers and acquisitions markets are showing continued strength
By Ben Scharff
As we navigate into the back half of 2018, a question
we often hear is "Where are the mergers and acquisitions (M&A) markets going?" Despite the profit and loss
noise created by the seemingly endless barrage of price
increases being placed on formulators, 2018 is proving
to be another strong year for sellers in the lubricants
market. The equity markets have started to stabilize
after six to eight weeks of volatility, debt remains readily
available, the benefits of recent tax reforms are being
felt and demand indicators for most chemical end markets tend to remain positive.
Looking at numbers alone, we expect to see an increase in
completed lubricants transactions in 2018. Both 2016 and
2017 saw roughly the same number of announced lubricants deals - in the high 20s - based on middle-market
investment bank Grace Matthews' estimates. At the time of
this writing, 2018 is moving at a similar pace, but there is an
overhang as a significant number of companies are currently
out-to-market. This is creating a ripple effect of attention
being placed on the lubricants sector from industry and
financial buyers - both with a lot of capital to put to work.
We believe that this will push annual transaction totals up
into the low to mid-30s, likely a 10 percent to 15 percent
increase in deal activity over prior years.
ILMA members have certainly been busy and are part of
the storyline here, most notably in the recent acquisition of the
majority of the operating assets of Royal Manufacturing Co. by
AXEL Christiernsson. This transaction not only extends product offerings for AXEL, but also allows it to leverage the strong
reputation and heritage of Royal while developing a much more
substantive footprint in North America.
Another interesting transaction included Italmatch Chemicals' acquisition of Afton Chemical Co.'s metalworking
fluids business. This came on the heels of the announcement
from France-based private equity firm Ardian that it would
be pursuing a process to divest the Italy-based portfolio

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JUNE 2018

| COMPOUNDINGS | ILMA.ORG

company. The metalworking fluids acquisition expands
the technology base for Italmatch in industrial lubricants,
and it allows the firm to model in projected synergies as it
looks to sell the collective businesses. This creates a value
arbitrage for Italmatch by showing increased profitability
from the acquired business and then selling it (along with all
of Italmatch) at a higher multiple - leveraging the size and
scale of the overall organization.
ACCRETION, ACCRETION, ACCRETION
Similar to Italmatch's arbitrage rationale for the Afton
metalworking fluids acquisition, we see that publicly traded
lubricants companies are benefiting from the significant
spread over historical trading norms in making accretive
acquisitions. Based on Grace Matthews' lubricants and finished fluids index, we see that select public companies in the
lubricants space are trading at 10.9 times EBITDA (earnings
before interest, tax, depreciation and amortization) as of the
end of April - over two times higher than the average of
8.6 times EBITDA since the start of 2010. This allows
publicly traded companies to pay more for an acquisition
and still have that acquisition be accretive to its earnings.
This is an important litmus test for any acquiring entity.
DEALING WITH MARGIN COMPRESSION
With across-the-board round two price increases (generally
between 4 percent and 10 percent) being implemented
by base oil suppliers and additive manufacturers, many
formulators are coming up with strategies revolving around
when and how they can push their own price increases
through to their end customers. Companies with a strong
market presence and high-service, value-add offerings tend
to be able to push price increases through faster and more
fully than competitors providing more commodity-like,
me-too products. Reciprocally, should we see a reversal in
the pricing trends of feedstock costs and a resultant drop in
raw material costs, we will see companies with this pricing
power being able to maintain pricing at current levels for a
longer duration of time and thereby grab additional margin
going forward.
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ILMA Compoundings June 2018

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