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Below is an excerpt from Grace Matthews’ recent Chemical Insights newsletter focused on chemicals and materials science distribution. The link to the full Chemical Insights Newsletter can be found at the end of this article.

The chemicals and materials science value chain seems to be returning to a period of normalized performance, as production outputs more closely reflect actual market demand. Recent shocks in supply chains that manifested in increased inventory holdings and subsequent destocking have subsided, and the industry has relearned a critical lesson from the volatility—the importance of supply chain reliability. Many companies adjusted the way they manage their businesses. For example, companies began identifying and qualifying alternative suppliers, on-shoring or near-shoring elements of their supply network, and reformulating products to utilize more readily available raw materials, all to fortify their supply chains against future disruptions. The value delivered by capable distributors of chemicals, ingredients, and other specialty materials during this period became apparent, and many have seen their businesses flourish despite periods of choppiness as the destocking dynamic played its way out. In short, distributors are doing more, and being paid for doing it.

We have also seen a continuation of the long-term trend toward increased M&A activity, particularly among distributors. From 2010 to 2020, an annual average of 40 chemical distribution deals were completed globally. From 2021 through 2023, that figure rose to an average of 65 deals per year, a 60%+ increase. This was driven by a few factors. First, the importance of the distribution business model has been enhanced as principal suppliers are increasingly focused on building stronger, strategic partnerships with distributors (again, reinforcing the importance of supply chain security). In addition, the highly fragmented distribution landscape continues to support consolidation and overall deal activity, particularly as larger distributors focus on adding scale, capabilities, product breadth, and global reach. This creates a strong environment to support inorganic growth.

Secular Trends Pointing to Increased Utilization of Chemical Distributors

The chemicals and materials distribution market has strong fundamentals for continued growth. Distributors fulfill an important role in increasingly complex and dynamic global supply chains. Many market players have benefited from favorable secular trends, and those that have an ability to adapt to fill market gaps have been rewarded with healthy growth in recent years. Several dynamics that are supporting continued growth in the industry today and in the near term are highlighted below.

First, the distributor/principal supplier relationship is only getting stronger. Distributors are increasingly viewed more as ‘channel partners’ than simply distributors or customers. Successful distributors not only provide greater market reach, customer access, and ‘last-mile’ services, but they also find ways to simplify aspects of a supplier’s commercial, marketing, manufacturing, and logistics operations. A recent survey of chemical manufacturers by Boston Consulting Group found that 76% of principal suppliers expect the share of their outsourced sales to increase within the next three years. Manufacturers are more frequently setting a strategy to streamline operations and focus on key accounts. Undoubtedly, another driver of the trend toward more utilization of channel partners is distributors’ increase in capabilities, expertise, and value-added services.

Teckrez, a value-added distributor of tackifier resins and monomers used in the production of adhesives, sealants, coatings, elastomers, and other products, is a prime example of this. In late 2023, Grace Matthews advised the shareholders of Teckrez on their recapitalization by Hidden Harbor Capital Partners. Not only is the company world-renowned for its expertise and specialization in tackifier resins, but they also maintain exclusive, global supply partnerships, a broad logistics network, and repackaging and formulation capabilities, among other value-added services. This broad capability set contributed to their long track record of growth and strong market interest when seeking a potential acquirer.

As markets and supply chains become more complex, distributor networks are expanding as well. Distributors who can serve larger coverage areas are benefiting in two ways. First, they are deepening relationships with principal manufacturing partners, allowing these partners to simplify their operations. Second, they also increase their relevance and importance to customers who may lack the resources to source materials from both domestic and international supply sources. A clear illustration of the increasingly global nature of chemicals and materials distributors occurred in November 2023, when the Alliance for Chemical Distribution (ACD) re-branded from the association’s former name, the National Association of Chemical Distributors (NACD). In the announcement, ACD cited as drivers for the name change the diversification underway in the chemical distribution industry, and the critical role its members serve to ensure supply chains continue to operate smoothly.

It is quite clear that chemicals, ingredients, and materials distributors are playing an increasingly important role in the overall economy. For adept distributors, this is good news, as many welcome volatility and change in their industry as an opportunity to demonstrate their value and grow. Manufacturers and customers alike are increasingly reliant on distributors to help them navigate these changes to deliver more efficient and better outcomes.

Strong Fundamentals for Distribution M&A Activity

Favorable secular trends and a fragmented market have accelerated M&A activity in chemicals, materials, and ingredients distribution in recent years. Strategic buyers are aggressively seeking to consolidate the market, enter new geographies, add capabilities and reach new end markets. Similarly, private equity has increasingly recognized the attractiveness of distribution business models and jumped in headfirst. Figure 1 shows deals from several of the most active strategic acquirers in North America, most of which are PE-backed, and illustrates the heightened level of M&A activity in the last few years, despite a tumultuous supply chain environment. New private equity platforms in that time period include Tilley Distribution (SK Capital), Shrieve (Gemspring Capital), and Integrity Partners Group (OpenGate Capital), among others.

FIGURE 1–ǀ–Select North American distribution acquisitions since 2019.

Grace Matthews fully expects M&A activity in distribution to continue in the near term, driven by several contributing factors. First, demand visibility and outlooks have improved as inventory destocking has largely subsided. From its peak in Q2-2022 to the end of 2023, average inventory levels for companies in the Grace Matthews Chemical Index (100 publicly traded chemicals and material science companies) declined 14%—generating cash flow! Potential sellers of distribution businesses now have more reliable forecasts from customers and more dependable supply chain relationships to confidently forecast demand, a critical factor buyers need to understand prior to underwriting an acquisition.

Chemical distribution is also a highly fragmented market. According to the most recent ICIS list of top chemical distributors published in May 2024, the top five distributors in North America had a market share of 54%. This figure is even lower in Europe, at 32%. The reality is that there are hundreds of independent distributors, collectively fulfilling a critical role in the supply chain. The sheer number of companies, coupled with well-capitalized strategic and private equity buyers, creates a recipe for consolidation through M&A.

To read our full Chemical Insights Newsletter, click here.