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Strong financial performance over the past two years has seen Europe's distributors stepping up M&A activity

and regional expansion Chemical distribution is an economically resilient industry that continues to offer tremendous opportunities for growth. Many distributors have recorded strong, if not record, earnings in the past two years. Copyright: RexFeatures Merger & acquisition (M&A) activity picked up in 2010 and 2011 after a significant slowdown in 2009 because of the financial crisis. Arguably, one of the most interesting deals in Europe last year was the merger of Barentz' industrial chemicals business with the chemicals distribution business of Belgian plastics company Ravago. The new company, Barentz Ravago Chemical Specialist, which became operational during the first quarter of 2012, has consolidated annual sales of more than 170m ($223m). Pavel Kratochvil, executive vice president and board member of the Netherlands-based group, says the merger was a perfect fit in terms of regional and product coverage, combining Barentz' strong industrial chemicals presence in Western and Central Europe with Ravago's chemical activities and infrastructure in Southern and Eastern Europe as well as the Middle East and Africa. Most of the major distributors made strategic acquisitions in 2011 and 2012. In Europe, Germany's Brenntag bought Multisol in the UK to gain better access to the lubricants industry; Netherlands-headquartered Univar purchased Eral-Protek in Turkey and Benelux-based Quaron; and IMCD Group, also headquartered in the Netherlands, bought Jan Dekker, as well as Italian firms Nutrivis and Organotec. Belgian specialty chemical distributor Azelis bought Finkochem in Serbia and S&D Group in the UK. Key purchases were also made in Asia-Pacific - by Brenntag and Nexeo (China), IMCD (Australia and India) and DKSH (Australia) - as well as in South Africa by Brenntag and IMCD. Latin America featured too, with Brenntag buying in Mexico and Univar buying in Brazil. Gnther Eberhard of Swiss consultancy DistriConsult says large distributors and private equity-owned second tier companies are preferably seeking growth outside Europe and the US, while the mid-sized, privately-owned distributors are looking for add-ons and specific niche acquisitions in Europe to strengthen their geographic coverage. "European M&A activity will be driven by small to mid-sized additions to tier two/midsized players with a clear strategy and strong balance sheet," says Eberhard. He adds that the Middle East and North Africa are being increasingly viewed as a growth opportunity despite political fragility. A number of European firms have opened offices in the region or are looking for add-ons. Indeed, several distributors, including Barentz and Univar, are extremely upbeat about prospects in the region. "We have very high expectations for the Middle East and Africa, as well as Turkey and the former CIS countries," Kratochvil says. In addition, private equity will ultimately exit investments, for example in Azelis and IMCD, either through a trade sale or initial public offering (IPO). Eberhard believes there could be slightly less M&A activity this year than last as potential sellers lack attractive alternatives for investing the proceeds of a transaction. On the other hand, the potential loss of critical mass in the near future may trigger some selling of smaller companies, while potential buyers are actively trawling the market. Johan van den Arend Schmidt, partner with UK-based PricewaterhouseCoopers (PWC) says the challenge is finding the right asset at the right price. He believes that the big

global distributors such as Brenntag and Univar could face potential competition issues in Europe with future acquisitions. It is true that attention at both these two majors has turned to emerging markets, but David Jukes, president of Univar Europe, stresses that Univar continues to be open to expansion opportunities in the European market. Birger Kuck, CEO of Germany's Biesterfeld, says that expansion into Belarus and Kazakhstan is on the agenda. In addition, the company is still looking to be present in Scandinavia and to grow further in the UK. Apart from ongoing consolidation, the major trends in the industry continue to center on differentiation, the need to attain critical mass, customers' growing range of requirements, as well as sustainability and the environment. Laboratories, service levels, technical expertise and supplier management all feature as areas where companies can differentiate themselves. Eberhard says that distributors need to have a certain breadth of offering and workload to keep people up to date with the best available technology. He believes that supplier management too is becoming an increasing factor in differentiation. "Cooperation and good regular systematic contact with suppliers can lead companies to recognize opportunities not just to streamline but also to identify future business potential. Regular project reporting is a key enabler in this context," says Eberhard. Customers and their increasing requests for market information, as well as technical advice and support, is another area where distributors can excel and grow their business offering. DELIVERING VALUE Jukes says that distributors must get closer to customers, leverage their networks, make faster decisions and bring valued propositions. "The one major trend in this industry is that distributors are seeking ways to give customers and suppliers real value in the supply chain. The challenge is how we continue to deliver value to customers in a very fast- changing dynamic world." PWC's van den Arend Schmidt says there is a lot of interest among the mid-sized distributors in providing additional services, such as blending, filling and drumming, as well as technical advice to smaller customers. "Smaller customers do not get the time and attention they need from big chemical companies. Whoever gets best in this will find it an important part of their growth," he says. The specialty market continues to become even more service oriented and Kuck says that customers expect their supplier to provide technical service, application support and specific chemical know-how He says that the distributor is an important development partner for the customer. One current issue of concern surrounds financing. Since the financial crisis in 2008, it has become increasingly difficult to finance the business, says Kuck. "The banks increased their requirements, our suppliers decreased their periods of receivables and our customers want to increase their term of payment." He believes it is now more important than ever for all parties to have an open dialogue and work together to find solutions for every member of the supply chain. "Building a partnership with effective and open communication can create a win-win-situation: increased sales, improved service, and a stable and efficient cooperation. Security and precaution is more important than lowest cost," Kuck says. Another challenge rising up the corporate agenda is the 2013 registration deadline for European chemical legislation Reach, which will hit more, smaller volume products.

Van den Arend Schmidt says that the very small distributors will find it increasingly difficult to survive. "Reach will create opportunities for some but it favors the big companies on cost and complexity. You will no longer be able to be the tiny company with a warehouse and three trucks. It will allow the middle, specialist suppliers to pick up more regional and smaller distributors." Players are reasonably optimistic for the year ahead, although the general consensus is that 2012 will be "more of the same", namely a continuation of the economic conditions and worries seen in 2011. That said, last year was a good year for most distributors, although it was, as Jukes puts it, a year of two halves. The first half was characterized by a very strong performance but the second half turned much tougher, particularly quarter four. "We did grow but not as much as we expected in Europe," says Jukes. He says that customers bought less and are buying only what they need and living "hand-to-mouth". Van den Arend Schmidt says that Europe is now a two-tier economy, with Northern Europe faring quite well but the southern countries of Greece, Spain and Portugal experiencing the worst of the recession. Figures from German industry association Verband Chemiehandel (VCH) show that chemical trade overall in the country in 2011 grew by 12.7%, reaching just over 13bn. However, Italian industry organization Associazone Italiana Commercio Chimico reports an average drop in volume for 2011 of nearly 8%. Kuck says Biesterfeld achieved record sales of more than 1bn last year with growth of 15%. Markets such as Poland and Turkey, which realized sales growth of 40%, were extremely strong and overseas markets such as Central and South America also performed very well. Kuck is confident that Biesterfeld will exceed 2011's performance and is expecting growth before acquisitions of above 5% for 2012. For Barentz, Kratochvil says 2011 was the best year in its history, growing by nearly 25% compared with 2010. Growth was primarily driven by Eastern Europe and emerging markets where its pharma and cosmetics division is seeing demand rise rapidly. But, he concedes it will be difficult to attain the same level of growth this year given the economic constraints in many European countries and industries. Barentz' strategy is to grow partly organically and partly from entering new markets and regions through acquisition, and it is targeting annual growth of 20-25%. Kratochvil stresses that the company's ambitious growth plans are to secure its future and continued independence as a family-owned entity. Despite the current economic turmoil and political uncertainty in Europe, the outlook for chemical distribution for this year and beyond remains positive. Emerging markets and niche acquisitions will continue to drive growth as will the world's ever-growing demand for chemicals. But, warns Eberhard, only strong and focused companies with a forward-looking strategy and mindset will thrive. By: Elaine Burridge +44 20 8652 3214