More M&A ahead for European chemical cos

NEW YORK (Reuters) - European chemical companies are under pressure to spin off some of their vast divisions, private equity players said on Tuesday, while U.S. chemical firms have already been through that rationalization process.

Companies such as Germany's Bayer AG (BAYG.DE: Quote, Profile, Research, Stock Buzz) and BASF AG (BASF.DE: Quote, Profile, Research, Stock Buzz) need to focus their operations, Deutsche Bank Financial Sponsors Group Head Mark Epley said on Tuesday.

"The chemical sector is begging for rationalization," Epley told the Reuters Hedge Funds and Private Equity Summit. "There are a number of companies under pressure to show more clarity," he added, noting that markets generally dislike complexity, especially if it occurs all at once at one company.

Some European companies still have some aspects of the traditional model of an integrated company made up of oil, chemical and pharmaceutical operations, that date back to a time when many were national companies.

In the U.S., however, most chemical companies already focus on their core products, having previously split off pharmaceutical divisions or rationalized their businesses in other ways. Dow Chemical Co. (DOW.N: Quote, Profile, Research, Stock Buzz) and DuPont (DD.N: Quote, Profile, Research, Stock Buzz), for example, are benefiting after having streamlined their businesses, Epley said.

Chemical mergers and acquisitions have been on the rise for the past few years with several big deals currently in the works both here and in Europe. For instance, Engelhard Corp. (EC.N: Quote, Profile, Research, Stock Buzz) opened itself up to bidders earlier this year after BASF made a hostile offer for the company. BASF is now taking part in the company's due diligence process.

"It is a fragmented industry with a lot of players and companies are always looking to do things strategically," Michael Kalb, managing director at private equity firm Sun Capital Partners said.

In Germany, Bayer made a $19.5 billion bid for Schering AG SCHG.DE last month, topping a bid by Merck KGaA (MRCG.DE: Quote, Profile, Research, Stock Buzz), part of a move that Epley said helps clarify that Bayer is more heavily weighing its pharmaceutical business.

Industry analysts have observed that many German companies, not just chemical firms, have been turning themselves into more competitive entities by increasing earnings, reducing debt and thus significantly increasing their financial firepower.

Since January, they have announced $106 billion worth of deals, just below the $110 billion notched up for the whole of 2005 and not far off the $163 billion announced in 2000, the height of the dot-com boom.