25 April 1994 00:00 [Source: ICB]
The three German majors, BASF, Hoechst and Bayer, have invested in the US chemicals market since the 1980s. And the habit has not disappeared with the recession, instead it has evolved with each member of the trio considering factors such as profitability, alliances and rationalisation.
By Peter Savage
THE US economy has been on the mend for well over a year now. Chemical companies have been slower than many to see the benefits, hindered by overcapacity, soft pricing and global competition.
The three German chemical majors are all big players in the North American arena: how have they fared?
At the depth of the recession, all three were struggling to remake themselves (see ECN 15 June 1992). Each tried to rationalise, shed marginal operations, and reposition.
But their heavy investment habits of the 1980s have remained. They are still among the leaders in new investments in the past two years, pumping $400-500m apiece into their businesses each year.
And spending on acquisitions has not stopped. What is apparent is that each of the trio sees many core businesses maturing, and a paramount need for better management.
It is hard to see any of the three - BASF, Hoechst Celanese or Miles - as a straightforward chemical company any more. Each is a loose-knit empire ranging from workhorse commodity chemicals through exotica like sophisticated pharmaceuticals, life science products and electronic chemicals.
In many respects, each has followed the same evolutionary path the majors of US parentage like Dow, DuPont and Monsanto followed in the 1980s.
The three are of similar scale: Hoechst Celanese is the largest with 1993 sales of $6.9bn, net income of $140m (roughly half after you allow for restatement of accounts caused by tax changes), followed by Miles at $6.5bn turnover and $132m profits. BASF sales were $5.2bn in 1993, with profits a marginal $46m pre-tax, although far higher on an after-tax basis due to a one-time windfall from changes in accounting rules. Each is intent on boosting profitability in 1994 and beyond.
Comments Peter Spitz, chairman of Chem Systems at Tarrytown, NY, of the big three in general: 'I believe the ICI demerger got their attention. They are beginning to realise it is difficult to run companies that huge with many product lines and different management styles.' This emphasis on 'producing molecules, not marketing' has caught up with them worldwide, and nowhere more so than in the US, where the recession made competition especially keen.
Not surprisingly, then, an emphasis on strategy, and product-by-product profitability is a common theme in discussions with the companies.
At Miles, the Pittsburg-based arm of Bayer, there is a constant churning of strategy, says Mark Yogman, vice president for strategic planning and organisation: 'in principle all the businesses in Bayer pursue their own strategies'. Nineteen out of 20 of Bayer's businesses are present in North America. Those strategies are a mix of internal development and expansion, and alliances or investments in other companies. 'The signal from the top,' says Yogman, 'is Bayer is a research company and we have a pride in what we develop.' But other moves are not to be ruled out.
For example, early this year it agreed to take a 28.3% stake in Schein Pharmaceutical, a generic drug group. In March, it signed a merger deal with ChemDesign of Fitchburg, MA, a fine chemicals producer.
Divestitures are also a part of the scheme of possibilities: during the early part of 1994, it sold its cleaning and insect repellant business to Clorox, unloaded an animal health group, Diamond Scientific, and put its Staflex speciality ester business up for sale.
In 1993, Miles spent nearly $400m on new investments, and plans to continue at that pace through 1994-95. Due onstream in 1995, a $170m Dorlastan spandex fibre plant at Charleston, SC, is one of the big ticket items.
Also planned: a $100m biotech plant at Berkeley, CA; $70m for organic pigments and $100m on film and paper packaging at Charleston; and $90m to triple production of maleic anhydride at Baytown, TX.
Bayer's biggest investment so far this decade was the acquisition of Canada's Polysar in 1991. Soon after it bought the group, the business hit a speed ramp with a downturn in the US automotive industry. But Yogman notes: 'worldwide, Polysar was profitable in 1992'. And since then, 'sales in the US and Canada have been growing modestly. In the long run it is a part of our core business'.
And reflecting that has been a decision to boost investment in some speciality elastomers where there are growth opportunities but capacity constraints.
As a more mature business sector than most, the aim with Polysar is to focus on quality, price competitiveness and becoming a worldclass supplier, which he admits is always 'easier to characterise than do'.
With the signing of the North American Free Trade agreement (Nafta) last year, Miles and its Mexican affiliates have had more discussions at the business group level about regional strategy. But Bayer do Mexico heads to Leverkusen rather than Pittsburgh in the current scheme of things.
Another company has been plugging ahead with spending is Hoechst. Since Hoechst Celanese, based at Somerville, NJ, was created in a megamerger in 1987, it has been quick on the draw with its cheque book. Chairman and ceo Ernest Drew has been at the helm through the recent business cycle.
One major thrust of Hoechst Celanese's spending has been in polyester, where it is a leading player in both fibre and resins. 'We are in the whole polyester chain, from DMT, PTA and ethylene glycol down,' notes Drew. It has worked hard to maintain the advantages that flow from such an integration. When the Celanese acquisition was made, the firm was forced by the Federal Trade Commission to sell off about 180 000 tonne/year of its modern polyester fibre capacity. 'We had to make the investment replace it,' says Drew.
Now, with a pair of startups in Spartanburg and Mexico, it has managed to do so. The benefits in spending all those dollars includes the majority of its capacity in 'fourth generation' processes, with a built-in competitive advantage.
Hoechst Celanese has been exploiting the PET bottle resin market too. In the US it converted a lot of obsolete polyester fibre hardware - essentially junking the fibre end of the units - to give itself some low-cost bottle resin capacity. In Mexico the firm did not have any old capacity, so built a new plant instead. Hoechst ranks itself the No. 2 PET bottle resin players in North America, after Eastman, with 320 000 tonne/year capacity.
The other key polyester markets are staple fibre, and industrial and tyre cord. With a boom in demand for high performance auto tyres, Celanese is adding some capacity in low-shrink, low modulus fibre in both the US and Mexico, at a cost of $100m. 'It is our own technology, state of the art, and is essential to keep us in our No. 1 position,' Drew explains.
Another sizeable commodity business inherited with the Celanese deal was methanol. Drew says flatly: 'it is not a strategic product for us (anymore)'. The company is seeing better returns from methanol in 1994, in a market that is tighter thanks to demand from gasoline reformulation. But it is not planning on adding to its production.
Would it divest? 'If someone came along with the right price, we would sell it', he confirms. Downstream, the company uses some methanol output to make formaldehyde, in turn used in its polyacetal resins. But overall it is a cyclical commodity line.
To Drew, the products' saving grace is that 'most of the capacity is written-off on the books, so we are a low-cost producer'.
Celanese knocked many Wall Street analysts on their backs last year when it paid what seemed to them an incredible $546m for Copley Pharmaceutical, a leading maker of generic drugs.
Drew cannot puzzle out why the price surprised observers. 'The deal was driven by our need to integrate,' he explains. The firm is a big player worldwide through its parent, in bulk actives, like ibuprofen.
Says Drew: Our strengths are in fine chemical intermediates, bulk actives and some pharmaceuticals. So the deal was part of getting the "whole chain". 'He argues that since Copley was the best generic drug business around, the only one for sale at the time, the price was right. Miles' participation deal with Schein this year was equally costly, if stated on an equivalent basis, he claims.
'Our idea was to get ourselves positioned correctly for the managed health-care changes,' says Drew. He see those changes coming whatever the fate of the much discussed Clinton administration's initiative. To be correctly positioned, the company decided, it need to be strong in genetics, otc products and ethical drugs.
|The German majors in North America -
figures for 1993
|Net sales, DMm
as % of group
|Operating profit, DMm
as % of group
|Return on sales, %||6.6||2.0||6.1|
|Capital expenditure, DMm
Source: company annual reports
Since the deal, he notes, some happy discoveries have been made: 'we postulated that there would be synergies with the worldwide business, and there were'.
So does the Copely deal represent peak growth for Hoechst Celanese in the US drugs business? 'We still need to get Hoechst a larger position in the US ethical business. My guess is we will do it by acquisition, alliance or joint venture. We offer a lot to US companies, because we are strong in Europe and Japan, while they are not, generally.'
At BASF, Parsippany, NJ, the rebound from the recession has been a little muted. Though chairman and president Dieter Stein described the growth of the North American economy in 1993 as 'encouraging', he also complained: 'selling prices remained under pressure as the world economy overall was rather sluggish in 1993, resulting in excess capacity which in turn caused very strong competitive pricing.'
In early 1992, BASF bought out Mobil's PS business in the US. This proved an easy integration play: the Mobil business was based on BASF technology, and fitted easily into the group's PS strategy. Since then, it has moved to expand the business with an 18 000 tonne/year high heat crystal PS plant at Joliet, II. PS pricing has been difficult.
Generally, the BASF polymers division saw business improve over 1992. Another area for expansion was polyurethanes, where BASF picked up rigid pressurised PUR technology from Olin Corp to expand its existing PUR lines. Upstream, BASF boosted capacity for TDI by 30% at Geismar.
BASF's chemicals division is planning to increase acrylic acid capacity at its Freeport, TX, site and the group has reinforced its ties with Sterling Chemicals as a long-term toll producer of phthalic anhydride and plasticisers for the German concern.
Though the carpet and paper markets have been slow, BASF also added a new Acronal acrylic copolymer plant in Monaca, PA, in mid-1993.
But it has had little luck in finding buyers or partners for its polyester or carpet fibres businesses with deals with Wellman and AlliedSignal falling through recently.
In coatings and colorants, it went through extensive restructuring and reorganisation in 1993, stopping making inks at Lodi, NJ, and consolidating operations on Holland, MI.
Water-based ink technologies and two-component urethane coating processes are both offered by the group, and should get a boost from the recovery in the US automotive industry.
In consumer products and life sciences, workhorses are magnetics media and agrochemicals. A major investment in the medical area was an $80m centre for oncology and immunology at Worcester, MA.
Each of the German big three is noted for playing its cards close to its chest. But it is safe to bet that the later 1990s will see each looking even less like chemicals companies. That will not happen through a process of diversification. Instead, each will expand its core businesses, with an eye to profitability. Product groups that do not make the grade will be unsentimentally axed.
And demergers or other bigger strategic moves? They may not start in the US . . . so watch the German parent companies for the first clues, say Wall Street analysts. ▪
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