Downstream merger mania
LAST YEAR was the busiest year for downstream mergers and acquisitions (M&A) activity since 2001. In a spate of deal-making to rival upstream M&A, global downstream transactions hit a combined $61.7bn, according to estimates by US brokerage John S Herold. That compares with just $34.8bn worth of deals in 2004.
A Herold report shows 97 downstream deals took place in 2005. The biggest acquisition was US independent refiner Valero's $7.6bn purchase of Premcor. The biggest refining deal outside the US in 2005 was the acquisition of the state-owned Turkish refiner, Tupras, for $4.1bn by Royal Dutch Shell and Turkey's Koc Holding, followed by SK Corporation's purchase of fellow South Korean Inchon Oil for $3.1bn.
Together, refining and petrochemicals accounted for the biggest slice of downstream-asset market activity in 2005 in terms of deal volume. Refining saw a total of 18 deals, with a total value of $22.6bn, while the value of the 24 petrochemicals deals over the period exceeded $26.6bn. The other deals included 17 natural gas distribution transactions, worth $9bn, 20 terminals and storage deals worth $2.2bn, seven service station deals worth $0.63bn, eight retail/marketing deals worth $429m and three propane distribution deals worth $133m.
Robust refining margins were the main reason for the surge in M&A activity. However, margins are now coming under pressure – since the start of the year, crack spreads have collapsed in the US and fallen in both the European and Asian markets.
There is also likely to be a slow-down in US M&A activity. Valero is unlikely to make large acquisitions until it has absorbed Premcor. In any case, there is a lack of obvious takeover targets. Regulatory issues too may stand in the way of mergers. Following the consolidation seen in the past few years, the US authorities are concerned that refining is becoming concentrated.
As a result, the driving force behind downstream deal-making activity this year is likely to be the petrochemicals sector – especially in Asia. "In the Asian petrochemicals sector, a lot of big companies are consolidating to gain competitive advantage," says Herold analyst Aaron Johnson. South Korea is the most active M&A market, as the region's largest spot exporter of petrochemicals. Last year, Honam Petrochemical completed the acquisition of KP Chemical in a deal worth $0.7bn.
The Middle East is also increasingly active. Kuwait's Al Qurain Petrochemicals Industries Company paid $252m in 2005 for 6% of Equate Petrochemical Company, a Kuwait-Dow Chemical joint venture. Saudi Arabia's state-owned petrochemicals giant Saudi Basic Industries Corporation, which joined the big league in 2002 when it bought the Netherlands' DSM Petrochemicals for Euro2.2bn, is also looking to grow via new acquisitions and mergers. It is also said to be looking at Chinese acquisitions as it targets the growing Asian market. "The Middle East will be a major competitor in petrochemicals because of its resource strength, and a lot of companies are gearing up and making their balance sheets stronger, because as things progress some companies will be eaten alive or will just disappear," says Johnson.
The biggest petrochemicals deal in 2005 was BP's sale of its Innovene chemicals business to the UK's Ineos for $9bn, followed by the sale of the Basell joint venture (between Shell and BASF) to a consortium comprising the US-based Access Industries and India's Chatterjee group, for $5.7bn.
The midstream is also likely to emerge as a significant market for asset shuffles over the next couple of years. The US natural gas sector will be a focal point for downstream M&A – gas demand is expected to remain strong, making access to the country's gas-gathering systems, pipelines and liquefied natural gas import terminals desirable. Indeed, there was a late burst of terminals acquisitions last year, with 20 deals taking place.