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Rome: Dorf Ketal, a leading global manufacturer and supplier of specialty chemicals, is currently in advanced negotiations to acquire Italmatch Chemicals SpA of Italy for a staggering $1.6 billion. This deal is being facilitated by the current owners, Bain Capital, according to sources familiar with the discussions.

Both parties have entered into exclusivity talks and are optimistic about finalizing shareholder terms (SPA) within the next few weeks, with a formal announcement expected by the end of the month. If successful, this acquisition will mark Dorf Ketal‘s largest purchase to date, highlighting the ongoing consolidation trend within the specialty chemicals industry.

Recent significant transactions in the sector include:

• Abu Dhabi National Oil Co acquiring Germany’s Covestro AG for €12 billion in 2024.
• Lone Star selling specialty chemicals company AOC to Nippon Paint Holdings Co.
• JSW Paints purchasing a major portion of Akzo Nobel’s India business for $1.6 billion.

Founded in 1992 by brothers Subodh and Sudhir Menon, Dorf Ketal has established itself as a leader in the hydrocarbons chemicals value chain, encompassing oil and gas exploration, refining, petrochemicals, and downstream retail fuel pumps. The privately held company reported a domestic revenue of Rs 5,479 crore in FY24, with revenue for the first half of FY24 reaching Rs 2,961.3 crore.

While Subodh Menon, vice chairman of Dorf Ketal, and Bain Capital have refrained from commenting, inquiries sent to Italmatch have yet to receive a response.

Strategic Rationale

The acquisition of Italmatch is seen as a strategic move to diversify Dorf Ketal‘s offerings and expand its product range. Italmatch, based in Genoa, operates across four key business segments:

• Water and oil treatment
• Lubricants, flame retardants, and plastic additives
• Performance products
• Personal care

Under the leadership of CEO Sergio Iorio, Italmatch has focused on specialty chemical additives, particularly in flame retardants and fabric softeners, and has a robust presence in the US with 20 manufacturing plants worldwide, including nine in the EU. This aligns well with Dorf Ketal‘s global footprint.

In FY24, Dorf Ketal attempted to acquire Pune-based Aquapharm Chemicals, primarily for its water treatment business, but the company was ultimately purchased by Phillips Carbon Black Ltd. (PCBL) from Kolkata. Additionally, Dorf Ketal had been preparing for an IPO, having filed a Draft Red Herring Prospectus (DRHP), but withdrew it last week due to this ongoing transaction.

Interestingly, CEO Iorio plans to roll over his stake to ensure continuity in management. An insider noted, “Italmatch’s entry into the water segment is particularly appealing for Dorf Ketal. The chemicals used in water treatment for the ethanol industry and oil and gas refining represent a rapidly growing market that Dorf Ketal aims to capitalize on.”

Dorf Ketal has a history of growth through acquisitions, having made at least a dozen purchases since 2003, including units from major companies like ExxonMobil and Clariant. This strategy has allowed the company to acquire significant R&D capabilities and intellectual property, creating barriers for competitors.

In 2022, Dorf Ketal expanded into Latin America, a key region for oil production and sustainable chemistry derived from plant-based sources. Italmatch has also undergone several rounds of private equity ownership, with Bain Capital acquiring control in 2018 and subsequently selling a minority stake to Saudi Arabian Industrial Investments Co (Dussur).

Under Bain, Italmatch has achieved growth through both organic means and strategic acquisitions, including a recent agreement to purchase a majority stake in Brazilian rival Alcolina, which specializes in water treatment for bioethanol and industrial applications. This has contributed to a doubling of earnings before interest, taxes, depreciation, and amortization (EBITDA).

In FY24, Italmatch reported revenue of €686 million, with an 8% increase in sales volumes year-over-year. Adjusted EBITDA rose from €115 million to €134 million, while the contribution margin grew to €276 million from €251 million.

India to Italy: Perfect Synergies

Italmatch has consistently grown through acquisitions, particularly in the water and lubricant additives sectors, maintaining a strong EBITDA margin of 20-21% despite global challenges in the chemicals market. Dorf Ketal’s strength lies in its R&D and product expertise, primarily acquired through M&A activities, which has established significant entry barriers for competitors.

With Morgan Stanley advising Dorf Ketal and underwriting the entire financing, potential synergies include relocating some EU-based manufacturing and optimizing production sites. Over the years, Dorf Ketal has evolved into a ‘wells to wheels’ company, providing solutions across the entire value chain from extraction to end-use.

Its manufacturing plants are located in India, Brazil, and Canada, with R&D units in multiple countries, including India and Singapore. As noted by Navroz Mahudawala, founder of Candle Partners, “Global specialty chemical deals of a certain critical size have been priced in the 10-14x EV/EBITDA range. However, given the current challenges in the chemical sector, buyers may find more favorable pricing compared to historical multiples.”

The global specialty chemicals market has grown from $1.03 trillion in 2021 to $1.14 trillion in 2023, with projections to reach $1.43 trillion by 2028, driven by demand from various end-use industries such as automotive, construction, electronics, pharmaceuticals, and food and beverages. Europe remains a significant market for specialty chemicals.

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