Players eye up opportunities

10 December 2001 00:00  [Source: ICB]

M&A activity in the chemical sector has slowed this year as a result of the economic slump and the events of 11 September. However, pharmaceuticals is one area where consolidation has continued to be strong, as players seek to enhance their market position. John Baker reports on recent changes in the industry

The economic slowdown that began in the US at the tail end of 2000, and was so forcibly accelerated this year by the terrorist events in that country on 11 September, has cut back M&A activity across the chemical sector. Effects have been felt equally in the US and Europe, as companies have had to battle with evaporating sales and earnings through 2001.

Nevertheless, there has still been a significant reshuffling of the asset pack, as major companies reshape their operations. And there is a small number of big deals still held up in the pipeline.

The much reduced prospects for 2002 may continue to dampen enthusiasm for M&A, or on the contrary may stimulate restructuring as weaker players look for salvation. The recent predators - BASF, DSM and Clariant - looking over the 25% stake held by Aventis in Rhodia may be harbingers of a more aggressive climate for M&A in the near term.

Despite the gloom which deepened throughout the year, 2001 kicked off in truly record-breaking style with the listing on 1 January on London and New York stock exchanges of the merged Glaxo Wellcome and SmithKline Beecham. The move, which saw the creation of GSK, the world's largest drugs firm with sales of $22bn, also marked the passing of two long-standing names in the sector: Wellcome and Beecham.

MAJOR EUROPEAN CHEMICALS M&A ACTIVITY 2001

Companies buying or investing/companies acquired or selling	Products/business	Stake	Cost
Abbott Laboratories/Knoll	BASF's pharmaceuticals business	acq	$6.9bn
Allianz Capital Partners and GS Capital Partners/Messer Griesheim	technical gases	Aventis sells 66.60% stake
BASF/Sisas	operations at Feluy, Belgium	acq	$142m
Bayer/Aventis CropScience	Aventis sells agrochemicals division	acq	$6.6-6.8bn
Bayer/Lyondell	PO/SM production jv	50:50 jv	$450m
BP/Solvay	polypropylene assets in Europe and US	acq
BP/Solvay	polyethylene assets in Europe and US	jv
BP/Veba Oel	refining, petrol retailing and petrochemicals	51%
CVC Capital Partners/Aventis	animal nutrition	acq	$268m
Degussa/Laporte	speciality organics	acq	$1.77bn
Degussa-Hüls/SKW Trostberg (Degussa AG)	chemicals	merger
Deutsche BP/Erdölchemie	BP takes over stake from partner Bayer	50 to 100%	$541m
Dow Chemical/Ascot	fine chemicals	acq
Dow Chemical/EniChem	polyurethanes	acq	$432m
EniChem/Polimeri Europa	Dow's share in polyethylene joint venture.	to 100%	E204m
Glaxo Wellcome/SmithKline Beecham	pharmaceuticals	merger	$167bn
Huntsman/Albright & Wilson	Rhodia's European surfactants business	acq
Ineos/ICI	Chlor-chemicals/Klea and Crosfield businesses	acq	$465m
Ineos/Phenolchemie	Degussa's phenol and acetone subsidiary	acq	$375m
Investors/Cognis	Henkel's speciality chemicals division	acq	$2.5bn
Kemira/Dynea/Sydsvenska Kemi	chemicals	merger
Novartis/Roche	pharmaceuticals	20%	$2.8bn
Sasol/Condea	RWE-DEA's surfactants subsidiary	acq	$1.15bn
Shell Chemicals/RWE-DEA	oil refining and petrochemicals	50%
Solvay/BP	engineering polymers	acq
Vopak/Ellis & Everard	distribution	acq

Drugs deals

The pharmaceutical sector has been one of the most active in terms of concentration this year, with the huge GSK deal acting as a catalyst, sorting out the committed from the not so sure. Certainly, growing scale in the sector was the spur for BASF and DuPont to quit the drugs business this year.

BASF made a distinctly sharp exit, selling its BASF Pharma arm to Abbott Laboratories for $6.9bn in March. DuPont rather lingered over its strategic withdrawal, first looking to continue on its own, then with a major partner, and then with a series of smaller buys to bolster activity. After the failure to clinch a deal for part of Aventis in France, it too decided to sell out. It sold the $1.5bn turnover business in June this year to Bristol-Myers Squibb, for $7.8bn.

These two divestments from leading chemical groups see the end in sight to a trend that started in 1993 when ICI split off its drugs business to create Zeneca. Since then, Dow Chemical, Ciba-Geigy, Sandoz, Hoechst, Rhône-Poulenc and Monsanto, and other chemical/drug combines, have unravelled drugs from chemicals to create a much sharper distinction between the two sectors.

Only Bayer and Roche of the major players continue to operate in both, and both are under pressure to follow suit. Investors argue they can achieve greater value from a pure-play drugs company, and managements see the benefits of not having to resolve the tensions arising from the differing investment demands of drugs and chemicals.

Bayer has this year carved out pharma and agchem as legal entities within Bayer, widely seen as a prelude to a more definitive split up of the business. A decision on what to do with chemicals and polymers is being made in December.

Roche, however, has fended off several attacks on its structure, largely through its shareholder structure which gives the family a strong say in the business.

The drugs sector itself has provided copious M&A activity in recent years, seeing Pfizer snap up Warner-Lambert and Pharmacia and Upjohn merging, and then taking in Monsanto to acquire Searle. All this has led to greater than ever concentration in the market - with the Top 10 pharma players now accounting for 45% of the global market of $145bn.

These top players are now completely dedicated to drugs, some with associated consumer healthcare and personal care products.

###10645###

TOP EUROPEAN COMPANIES BY 2000 SALES, $M

Company	Sales, $m	Change, %	Operating earnings, $m	Change, %
BASF	34 141.51	22.00	2915.89	52.80
Bayer	29 416.26	13.40	3121.99	-2.10
Novartis	21 974.00	10.30	4838.00	7.35
Aventis	20 162.00	9.10	3425.00	25.50
Atofina	19 796.68	20.70	1545.32	36.80
Degussa	19 249.60	22.90	638.27	57.70
Roche	17 597.00	4.00	4376.00	11.00
Shell	15 205.00	18.00	819.00	-7.50
Akzo Nobel	13 300.05	-3.00	1569.07	21.10
ICI	11 627.42	-8.30	238.61	-81.30
BP	11 247.00	19.80	1036.00	11.00
Solvay	8418.08	12.60	632.57	9.20
Air Liquide	7692.43	23.90	1059.98	19.40
DSM	7683.88	27.70	713.30	35.60
Rhodia	7046.57	34.30	471.10	21.30
Clariant	6606.97	14.30	63.05	-90.50
EniChem	5715.90	46.90	3.80	-101.10
BOC	5240.83	17.30	813.94	35.30
Celanese	4945.61	20.60	78.83	-115.90
Ciba Specialty Chemicals	4933.22	9.10	546.89	38.60
Syngenta	4876.00	4.20	1000.00	122.70
Norsk Hydro	4633.13	22.10	na	na
Schering	4267.45	22.30	607.87	19.40
Borealis	3567.45	25.70	87.38	-57.40
Linde	3421.34	134.00	469.00	121.80
Cognis	3026.06	11.60	208.96	22.90
Ineos	3000.00	na	na	na
Rutgers	2970.97	28.60	na	na
Wacker-Chemie	2902.59	22.90	299.19	117.20
Kemira	2361.20	-1.60	1622.00	57.70
Repsol	2322.26	70.60	144.37	15.20
UCB	2093.36	19.70	588.88	14.00
Tessenderlo	1726.74	15.70	128.22	32.40
International Flavours & Fragrances	1463.00	2.00	na	na
EVC	1120.76	28.40	-26.59	loss
Lonza	1063.18	8.10	204.15	14.30
Perstorp	981.04	-10.80	43.69	-36.90
Elementis	861.40	7.30	70.53	62.10
Groupe SNPE	780.29	-2.63	30.49	-32.34
Yule Catto	768.35	-3.80	72.14	-36.46

Agchem divestments

The late 1990s attempt to run life-science companies with integrated pharma and agchem activities has also come virtually to an end this year, with the recently agreed sale of Aventis's CropScience arm to Bayer. The deal, expected to close in Q1 2002, also leaves Schering, owner of a 24% in Aventis CropScience, a pure-play drugs concern.

This move follows a number of similar moves in 2000: the creation and spin-off of Syngenta by Novartis and AstraZeneca, the spinning out of Monsanto's agchems activities from the merged Monsanto/Pharmacia and the sale by American Home Products of Cyanamid to BASF. Again, this leaves Bayer as the only major player with interests in agrochemicals and pharmaceuticals.

###10646###

As in the pharmaceuticals sector, this process has resulted in fewer players over the past decade, and a greater concentration of market share by the leading producers. Since 1990, Ciba-Geigy, ICI/Zeneca, Rhône-Poulenc, Hoechst, Schering, Sandoz, Shell, Cyanamid and Rohm and Haas have quit agrochemicals, close to half the top 20 companies. Only nine players now have a market share of over 2% and more, down from 20 players in 1980.

Petrochemicals slowdown

This year also started with a major bang in the chemicals sector, when on 6 February Dow Chemical wrapped up its drawn out negotiations with US and EU regulatory bodies to close its take-over of Union Carbide, to create a giant with 2000 pro forma sales of $29.5bn. This leapfrogs it into the global No. 2 slot, after BASF, virtually on a par with Bayer and ahead of DuPont and ExxonMobil's chemicals operations.

The timing of the deal has not proved the easiest, given the sharp downturn in the commodity chemicals sector, which is where Carbide largely operated. But a stringent cost-cutting merger integration is under way, designed to achieve savings of $1.1bn in synergies by the first quarter of 2003. As for the timing, $650m of the savings was slated to be achieved this year, with the rest coming in in 2002. 'The successful integration of Union Carbide is the number one priority for Dow's leadership,' said president and chief executive officer Michael Parker when announcing the merger programme. 'Virtually every Dow employee will have a portion of their total compensation tied to our ability to achieve cost synergy targets', he told reporters.

Speaking to ECN earlier this year (ECN 2 April), Parker also emphasised Dow's resolve to maintain a balanced portfolio of businesses, split between commodities and specialities. To this end the company has made a number of other acquisitions this year, notably the polyurethanes activities of EniChem and the agrochemicals business of Rohm and Haas, for which it paid $1bn.

In Europe, it has moved to expand its relatively new PP business with the purchase from Basell of its 195 000 tonne/year plant at Cologne, Germany.

The petrochemicals sector spent most of the rest of the year in M&A torpor. Ineos, which at the beginning of the year had taken over ICI's Chlor Chemicals, Klea and Crosfield businesses, took a controlling stake in hard-pressed PVC producer EVC. But on the whole, players were happy to digest recent moves and restructuring.

During the year, Basell, the 50:50 polyolefins joint venture between BASF and Shell, completed the disposal of three PP plants, as required by the European Commission. One went to Dow, as already mentioned. The others went to ExxonMobil, which picked up the 250 000 tonne/year unit at Lillebonne, France (together with 130 000 tonne/year of compounding capacity), and Belgium's Domo Group, which bought the 180 000 tonne/year Rozenburg plant in the Netherlands.

Solvay, evidently feeling a little exposed as a non-integrated producer of PE and PP, concluded several linked deals with BP. It sold BP its PP business, and the two firms joint ventured their PE activities separately in Europe and the US. In a related move, Solvay bought BP's performance polymers business, largely built up by Amoco in the US prior to its acquisition by BP.

But this year's relative inactivity leaves plenty in the petrochemicals M&A pipeline. The Dow/Carbide deal only went through on the condition that Dow sold its half stake in Polimeri Europa, Carbide's joint venture with EniChem. In the end, EniChem took the Dow stake in part exchange for its PU business. But with parent company Eni's much publicised strategy to exit chemicals, the business went straight up for sale again.

Also declared as up for grabs is the DSM petrochemicals business, which the company has decided is too heavy on investment to keep alongside its strategic focus on fine chemicals and specialities. It, like Eni, is looking for a partner which will eventually take the business off its hands.

Both businesses have attracted the interest of Sabic, Saudi Arabia's state-owned petrochemicals producer, which is looking to increase its market presence in Europe. It looks almost certain that Sabic will sign a deal to take a 50% stake in EniChem in the coming months.

The DSM business has also reportedly attracted the interest of ExxonMobil, which has been looking to boost its European polyolefins position, based around operations at Notre Dame de Gravenchon, for some time. In previous years it has taken Borealis's stake in the Antwerp crackers, originally owned jointly by Petrofina and Neste, and has recently boosted PP via the Basell deal.

A joint venture or outright purchase of DSM's petrochemicals assets would add a strong ethylene position in the Netherlands and new polyolefins capacity at Gelsenkirchen, Germany, the result of investment after DSM's purchase of Veba's polyolefins activities.

Two other major petrochemicals deals are also pending, driven by Shell and BP's refinery and downstream ambitions in Germany. Both, however, are being held up by European Commission enquiries into the concentration they bring in olefins capacity.

Shell announced in April that it is to purchase 50% of RWE-DEA's petrochemicals and refinery assets, including the 500 000 tonne/year cracker at Wesseling, Germany. And in July BP said it was pursuing a deal with E.On to take a 50% stake in its Veba Oil subsidiary, bringing it 1.3m tonne/year of ethylene capacity at Gelsenskirchen. This would further strengthen BP's hand in Germany, following its purchase last year of Bayer's half share in Erdölchemie.

Both Shell and BP were expecting the deals to be wrapped up this year, but the European Commission investigation into the petrochemicals aspects of the deals has pushed the timeframe into next year. It is reportedly especially concerned over the dominance BP will have on the ARG pipeline.

Several other deals deserve mention here. Sasol and Huntsman both added bulk to their European operations, Sasol through the purchase of RWE-DEA's surfactants and solvents business Condea, and Huntsman via the acquisition of Albright & Wilson's surfactants activities from Rhodia.

Sasol was also in the running at one point for the Sisas phthalic and maleic anhydride and butanediol assets in Feluy, which went eventually to BASF, saving them from bankruptcy and closure. But not before an intense scrutiny of the deal by the European Commission. It concluded it was best to keep the assets operating, even in the hands of a major competitor like BASF, than to see them shut down.

Huntsman was also interested in the sale of Cognis by Henkel, but lost out to financial buyers Schroder Ventures (now known as Permira) and Goldman Sachs, which put together a 50:50 joint venture to sign the $2.5bn deal.

TOP EUROPEAN PRODUCERS BY CAPITAL EXPENDITURE, 2000

Company	Capital Expenditure, $m	Change, %
BASF	8203.42	127.30
Bayer	2514.12
Atofina	1285.08	-18.80
BP	1215.00	-23.30
Degussa	1066.63	-31.70
Solvay	872.87	13.20
Shell	726.00	-38.4
Akzo Nobel	688.61	-9.00
BOC	606.06	-18.00
DSM	567.98	-1.30

TOP EUROPEAN PRODUCERs BY R&D SPEND, 2000

Company	R&D	Change, %
Bayer	2272.87	6.30
BASF	1449.39	14.50
Schering	770.29	18.60
Akzo Nobel	750.34	8.80
Syngenta	537.00	10.00
Atofina	474.90	na
Solvay	341.93	4.30
ICI	313.65	10.60
Clariant	258.46	-28.60
DSM	250.75	na

TOP EUROPEAN PRODUCERS BY EMPLOYEES, 2000

Company	Employees	Change, %
Bayer	118 932	-0.20
BASF	103 273	-1.29
AtoFina	72 253	-0.80
Akzo Nobel	68 400	0.60
Degussa	62 941	0.80
ICI	45 936	-14.10
BOC	42 709	1.40
Solvay	32 300	na
Clariant	31 546	8.80
Rhodia	29 448	18.70

Building up/tearing down

Outside pharma and petrochemicals two ongoing M&A stories have been running this year - the reshaping of Degussa into a speciality chemicals company, after its mergers with Hüls, SKW Trostberg, Th Goldschmidt and Laporte, and before its sell-off by majority owner E.On, and the assembly by Industri Kapital of a Scandinavian chemicals player of European scale.

E.On holds a 64.5% stake in Degussa, now one of the world's largest chemicals outfits, with sales last year of $19.25bn. It declared its intention in April this year to sell its holding over the next three to five years, in line with its strategy to concentrate on energy. It will also unload its holding in logistics firm Stinnes, owner of Brenntag, and Veba Oil to BP.

Since its formation early last year, Degussa has embarked on a E6bn disposal programme, which is expected to be complete by the end of next year. Assets unloaded so far include Phenolchemie (to Ineos), dmc2 (to OM Group/Ferro), zeolites (to FMC Foret), the dental business and parts of the drugs business Asta Medica, split up for piecemeal sale.

###10647###

Still to go are Degussa's banking operation and various other smaller units. What the future holds for the company once this process is complete is not entirely clear. Rumours of early contacts between Bayer and Degussa over a merger of their chemicals activities have been denied by both companies.

But if Bayer does decide to split itself up, then its chemicals arm looks somewhat underweight to compete as a major player, so a merger of some sort could be attractive. A cash sale of the E.On stake in Degussa would certainly stretch most acquirers, given its size; a flotation is a third possibility, always very dependent on the economic and stockmarket conditions of the time.

While Degussa has been focusing down, Industri Kapital continued its acquisitional build up in Scandinavian chemicals with a surprise, and somewhat controversial bid in August, to take the Finnish government's 56% holding in Kemira.

It plans to merge its existing operations Dynea and Sydsvenska Kemi (SSK) with Kemira, into a E4.3bn turnover business, in which the government will still hold a minority 34% stake. The new company, to be headed up by current Kemira boss Tauno Pihlava, will be based in Helsinki and will likely be relisted on the stock market within 3-5 years after restructuring.

Dynea and SSK already combine the businesses of Neste Chemicals, Dyno Chemicals and Perstorp, which Industri Kapital has acquired and put together in recent years. Its aim, says chief executive officer and chairman Bjorn Saven: 'is to build a worldclass speciality chemicals group... and we are convinced we have found an excellent partner in Kemira to achieve this.'

The privatisation of Kemira through a sale to a venture capital player has inevitably caused a lot of concern amongst Finnish unions, worried about job security and cut backs during restructuring. The deal still needs to be approved by Finland's parliament.

So, despite a gloomy outlook for chemicals profitability next year, M&A activity look certain to continue, at least as deals already announced go through to completion.

But we are unlikely to see much venture capital-backed activity as the appetite of the major funds has been dulled. Indeed, many of their seemingly attractive acquisitions will be performing below expectations for some while. It will be the deep pockets of the global energy-backed chemicals concerns who will make the running in the next few years, bolstered by ongoing restructuring in the Germany chemicals sector.

For the latest chemical news, data and analysis that directly impacts your business sign up for a free trial to ICIS news - the breaking online news service for the global chemical industry.

Get the facts and analysis behind the headlines from our market leading weekly magazine: sign up to a free trial to ICIS Chemical Business.

Printer Friendly