THE journey of Petronas Chemicals Group Bhd (PetChem) to expand into the higher-margin business of specialty chemicals is making headway.

       This week, the petrochemical giant announced its biggest acquisition thus far of €1.54bil (RM7.15bil) to buy Swedish specialty chemicals maker Perstorp Holding AB from European private equity firm PAI Partners.

       ALSO READ: Perstorp deal a boon for PetChem

       The price tag, which is close to 9% of PetChem’s current market capitalisation, is based on an enterprise value (EV) of €2.3bil (RM10.69bil), minus adjusted net debt of €762mil (RM3.54bil).

       If successful, the deal will mark the group’s second acquisition in specialty chemicals, which are raw materials used to manufacture consumer products such as high-performance tires and LCD televisions.

       In September 2019, PetChem bought BRB Group (formerly the Da Vinci Group, NV) for €163mil (RM761mil).

       PetChem’s main revenue anchor is the olefins and derivatives (O&D) segment, followed by fertilisers and methanol.

       ALSO READ: PetChem buys Perstorp in RM10.5bil deal

       However, the prices of these petrochemical products and their underlying feedstock are subject to significant fluctuations due to global supply and demand, plus price movements of key commodities such as crude oil and natural gas.

       To future-proof its earnings, the group aims to derive at least 30% of revenue from its non-traditional business by 2030, from about 13% now. Towards this end, it’s been on the prowl for potential companies and had examined over two dozen targets before finding a good match in Perstorp – a company with comparable capacity and capability.

       “With Perstorp, we have created a sizeable platform to build on for the next phase of growth for PetChem,” managing director and CEO Mohd Yusri Mohamed Yusof tells StarBizWeek.

       Elaborating, he says the platform is “continuing to bring value to the customers based on the specialty DNA we have identified”.

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       Apart from market penetration, the things it looks out for are technology and know-how; a customer-centric model and the innovation culture of a (target) company.

       In this respect, “Perstorp owns proprietary oxo and polyol chemistries that PetChem can easily replicate in South-East Asia by utilising our feedstocks such as ethylene, propylene and methanol without having to license from or partner with a third party,” he points out.

       The Swedish group is also strong in innovation and has a pipeline of exciting new products, which are developed largely in-house from its three research and development or R&D centres in Sweden, the Netherlands and India.

       “Innovation is a major driver for the development of sustainable products and processes, and Perstorp’s sustainability strategy will benefit PetChem in accelerating our own sustainability agenda in line with our commitment to conduct and grow business that contribute positively to society and the environment,” he explains.

       ALSO READ: PCG cautious about rising oil, commodity prices

       Where market penetration is concerned, Yusri says both companies will have wider exposure specifically in resins and coatings, engineering fluids and animal nutrition where Perstorp is strong.

       Established more than 140 years ago, Perstorp is a niche specialty chemicals manufacturer with a presence in 26 countries, including Europe, the United States and Asia Pacific.

       AmInvestment Bank Research notes that the company has a “growing exposure to environmental, social and governance or ESG trends which offer sustainable products with margins that are 10% to 15% higher than conventional commodities”.

       Yusri explains that the specialty chemical business differs significantly from the commodity business due to its value pricing and customer-centric model. As such, the movement of pricing is not as volatile.

       On whether there would be more mergers and acquisitions or M&As, Yusri says the group will continue to assess “bolt-on acquisition opportunities to strengthen our specialty chemicals business further, particularly in attractive end-markets such as paints and coatings, construction, automotive, personal care, and feed and nutrition to enhance our competitive position”.

       However, the near-term focus is to grow Perstorp, which is estimated to require around €100mil (RM464mil) to €200mil (RM928mil) yearly for growth and maintenance capital expenditure.

       Given PetChem’s net cash of RM14bil, the acquisition is expected to be funded internally. Private investor and former investment banker Ian Yoong says the price with an implied valuation of nine times EV over earnings before interest, taxes, depreciation and amortisation is “attractive and the premium for control is low”.

       “The acquisition of a well-managed business with a deep moat (specialty chemicals) is definitely better than money in the bank, especially when the rate of inflation is skyrocketing,” he says.

       He expects the acquisition to contribute about 7% to PetChem’s earnings in financial year 2023 (FY23).

       Perstorp’s revenue has been in the range of RM4.2bil to RM6.5bil for FY17 to FY21. In FY21, 52% of its sales were derived from Europe, the Middle East and Africa. The Asia-Pacific region contributed 26%, while the Americas, 22%.

       MIDF Research in a report says the acquisition is a “strategic fit business-wise and location-wise”, allowing each other to expand their products beyond their existing markets.

       “We opine that this acquisition is within our expectations for PetChem’s financial growth for FY22 and its future plans to build a vast petrochemical empire in the South-East Asian region,” it adds.

       The proposed deal is subject to approval from PetChem shareholders, and anti-trust clearances. Both are expected to be obtained within four months from the acquisition date.

       PetChem is expected to release its first-quarter FY22 (1Q22) results later this month. Analysts anticipate another stellar set of results, but it could come in flattish quarter-on-quarter against the record high profits of RM2.06bil in 4Q21.

       Revenue in the period stood at RM6.97bil with South-East Asia accounting for 57% of total sales

       Brent crude oil prices were recently traded at or above the US$100 (RM439.75) per barrel threshold versus 4Q21’s average of US$79 (RM425.93) a barrel.

       Shares in PetChem closed at RM9.99 yesterday, giving the stock a market cap of RM79.92bil.