Analysis: Chop and change at Swiss Lonza

13 August 1999 19:52  [Source: ICIS news]

LONDON (CNI)--As champagne chills for the aluminium and packaging mega-merger involving Aluisuisse Lonza Group (Algroup), market speculation is hotting up that the independent company being created to hold the Swiss group's demerged chemicals businesses - Lonza Group - will not stay independent for long.

By stripping away its other divisions, Algroup's proposed merger with Canada's Alcan and Pechiney of France has also thrown into question the logic of continuing to keep its fine and specialty (F&S) chemicals in the same operation as the virtually unrelated intermediates and additives (I&A). Commentators see a potential break-up of the chemicals team somewhere down the road as suitors home in on the lucrative F&S operations, leaving I&A to safeguard its future.

Lonza Group is to be created as a pre-requisite to the tripartite aluminium and packaging merger and, as the holding shop for what's not wanted in the new show, will contain Algroup's energy assets as well as the chemicals. Being established in a tax-free, debt-free transaction that also brings $280m in cash, Lonza Group is to be set free to make its own way as a new platform for growth, said a spokeswoman for Algroup.

However, just before its runs off, Lonza Group has to - upon completion of Algroup's three-way merger - pay the new conglomerate $170m, which leaves it with $110m net. Along with up to almost $44m in funds from Algroup shareholders exercising rights to hold stock in Lonza - it is to be listed on the SWX Swiss Exchange - the new chemicals-energy company should start life with a dowry of some $154m.

With corporate mouths watering over Algroup's F&S businesses, are there alternatives to the demerger plan to create Lonza Group? Would Algroup entertain them? No - said the spokeswoman. Contractually, she said, the three-way merger requires the chemicals and energy businesses to be demerged. "What we are creating is an independent company," she stressed, repeatedly.

Entertaining alternative proposals for sell-offs or other deals for the chemicals prior to the demerger, even if possible, would also complicate the main merger process and hoped-for six month timetable, possibly leaving Algroup as a hostage to fortune. There is also another reason for not derailing the plan for chemicals - tax. Breaking up and selling off the chemicals divisions would create hefty capital gains taxes, whereas the businesses are to be demerged tax-free.

So the chemicals are to stay together, alongside the energy business, and once demerged the Lonza Group's fate is in its own hands. Might the chemicals operations be acquired soon after? - "It's possible", said the spokeswoman. Given that Lonza Group is not going to demerge its constituent parts after just being created, analysts and commentators are weighing the possibilities for competitors' involvement.

Patrick Lambert, specialties analyst with Salomon Smith Barney, believes that interested parties face two problems over Lonza Group - a second tax matter, and unwanted assets in the portfolio mix. Rather than a takeover of Lonza by an F&S-hungry competitor, he thinks a "merger of equals" may be a more tax efficient route. But on the asset front, Lambert thinks the merger partner won't be too picky. It maybe a question of buy first to secure the F&S, ponder the portfolio later.

Analysts and commentators have mentioned a handful of likely contenders to merge with Lonza Group: Clariant, Ciba, Eastman Chemicals, DSM, Rhodia and also DuPont - although it may not suit the merger of equals condition, it might stomach the tax hit. It is not expected that that they will remain on the sidelines until Lonza Group is created.

A number of sources suggest contacts are already underway - both for F&S and I&A, which must think of survival - and the talks could lead to an agreement before Algroup's chemicals businesses are demerged in the fourth quarter. The Algroup spokeswoman does not expect the extraordinary general meeting of shareholders to vote on all the merger/demerger issues until then.

Lambert believes that a deal is "going to happen so fast" that the merger partner will not fret over the asset mix, initially.

A spokesman for Clariant told CNI that Algroup's F&S chemicals "would fit quite well in our strategy" but said no formal negotiations were taking place. However, he said that Clariant would be looking at developments in Algroup over the coming weeks.

There is also the question of Ems-Chemie. It holds a small stake in Algroup which, according to the demerger plan, would give it exercisable rights to purchase one-for-one shares in Lonza Group. With the possibility of a toehold in the company, it is wondered what might be its strategy - especially as it has said the Algroup stake was only a financial investment.

While the F&S operations grab the spotlight, there remains the issue of the rest of the Lonza portfolio. Power stations are not likely to be wanted by chemicals companies, and its remains to be seen if the Algroup's cracker would fit into their plans. But what of the I&A businesses - primarily maleic anhydride (MA) and phthalic anhydride (PA)? Lonza may have held F&S and I&A together but would a merger-partner? If not, the I&A operations need to find a home and, like F&S, will not hand around before opening talks.

However, the list of contenders that may look to the I&A activities is wide, especially at a time of oversupply in the MA market and weak results for I&A just posted at the half year. Italy's Sisas may not be a contender; it recently started up a plant in Belgium. Likewise, the Condea-Huntsman joint venture started up an MA plant in Germany in July. But, "anything is realistic", said one specialist commentator.

He said that one of the factors for interested MA parties will be dealing with Algroup's captive requirements to supply its unsaturated polyster resins (UPR) and maleic acid for food products. That could open the door to UPR producers - the likes of DSM, BASF, Creanova, Ashland and even Alpha/Owens-Corning - to take the package and, as UPR is oversupplied, run down that side and be left with the MA. The need for MA could even attract the attention of Reichhold, which is becoming more active in Europe, it was suggested.

By: Patrick Reynolds
+44 208 652 3214

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