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3 Industries and 3 Stocks Riding a 2012 M&A Boom

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2. Chemicals and Huntsman

After Eastman Chemical (EMN) announced a $3.4 billion acquisition of specialty plastics and chemicals maker Solutia (SOA), rival chemicals makers like Huntsman (HUN), Albermarle (ALB), Celanese (CE), Cytec (CYT) and OMNOVA Solutions (OMN) emerged as potential takeover candidates in analyst reports.

"2011 was an unusual year, in that chemical companies that conducted large M&A did not remain in the penalty box for long," wrote Jefferies analyst Laurence Alexander, in a note reacting to Eastman Chemicals bid, signaling that the industry may see added deals to go with Eastman Chemicals' bid and a hostile $1.2 billion offer by Westlake Chemicals (WLK) for Georgia Gulf (GGC). At a market cap of $3.25 billion, Huntsman was one of the larger-cap chemicals companies that could find takeover interest, according to Alexander's note.

Jefferies expects that U.S companies may cut deals to add hard to get emerging market chemicals growth, while Asian and Middle Eastern giants may look cutting deals to get a greater access to basic material supplies. "We expect consolidation to continue in the sector, with U.S. and European firms looking for scarcity value and market-leading positions, Asian firms looking for technology and Middle Eastern firms looking for vertical integration," wrote Alexander.

For Eastman Chemicals, the move to buy Solutia, which makes aftermarket materials like glass and coatings that are used by automotive and architectural customers, is expected to diversify the company's revenue further into emerging markets and boost earnings through cost synergies. Those businesses could also benefit from a continued post-crisis recovery in global auto sales and real estate construction.

In January, Goldman Sachs analysts pointed to European chemicals giants like Air Luquide and BASF as potential acquirers as they shift their earnings to downstream processes, on earnings volatility of chemical development. A continuation in chemicals deals would be a boost to the industry, which has faced a post-crisis M&A lull.

Since the financial crisis, there have been few notable U.S. deals outside of Berkshire Hathaway's (BRK.A) $9.2 billion acquisition on Lubrizol, CF Industries' (CF) $4.7 billion purchase of fertilizer producer Terra Industries and Cargill's spinoff of Mosaic (MOS).

Hostile offers like Air Products & Chemicals (APD) $7.5 billion offer for Airgas (ARG) and Agrium's (AGR) $3.3 billion offer for CF Industries (CF) failed as targets fended off bids at what they called cyclically low and undervalued prices. In 2012, more buyers and sellers may come together on scarce opportunities in the sector as stock prices and balance sheets recover.

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