ICI defensive and under pressure

31 January 2002 16:40  [Source: ICIS news]

ICI has been forced into a difficult, defensive position by its inability to successfully pay down debt.

The next few days are going to be far from easy. The company has been pushed to reveal early that it wants to raise £800m ($1.13bn/Euro1.30bn) from a rights issue and sell the Synetix catalysts businesses, and has run the risk of putting itself into freefall until details of both proposals are made available.

Credit rating agencies, particularly, have become increasingly concerned with ICI’s persistent, costly debt mountain but analysts and others have joined the bandwagon. The ICI board couldn’t live with a credit rating downgrade which was likely had action not been taken. ICI hopes that the rights issue and divestment plan announced on Thursday will eventually secure a BBB/Baa2 rating (the rating is currently BBB) and help it refinance debt when needed on reasonable terms.

The big problem is that ICI is unlikely to be generating free cash flow this year and not much next. That is worrying. The cost of servicing debt and of pushing through the disposal programme have been an unwanted burden and constrained the company for the past four years. The two steps announced today will go some way towards easing the situation but they will also pull the focus towards the year end results and prospects for the business in 2002.

ICI gave some headline 2001 figures today to ease the bare bones rights issue announcements. They are encouraging. Sales in 2001 for the on-going businesses (including Synetix in 2001) and excluding the regional operations were on a par with 2000. Profits before tax, exceptional items and goodwill amortisation were estimated at £401m. In 2000, pre-tax profits before exceptional items and goodwill were £450m on sales of £6.4bn. Net debt at the 2001 year end was £2.9bn compared with £2.8bn at the end of 2000. Full details will be given on Monday (4 February) when the company releases the 2001 results three days ahead of schedule.

The figures are likely to show that ICI has managed to ride out much of the US-led recession because of its mix of speciality products. In the statement issued today, ICI talked of the financial results demonstrating the quality of the business in a tough economic climate. The trouble is that ICI will not see the sort of rebound others, which have fallen further, may encounter. In other words, the upside potential may not be that great and ultimately put further negative pressure on perceptions of just how well the company can perform.

ICI’s intention to sell Synetix is not that surprising to industry insiders; this group of businesses does not fit too well within the current ICI portfolio of consumer-oriented products. Synetix does important business with the world’s methanol, ammonia and oil and gas producers, among others, and has been growing strongly but it needs to be nurtured. The catalysts business is consolidating and ICI is keen to catch that wave and capture what may be not inconsiderable value from the sale. Synetix sales in 2000 were £125m and the business saw strong growth in 2001, by as much as 21% in the third quarter.

Synetix has new technologies in markets potentially worth some £100m. Third quarter profits were well ahead of the prior year period and the business was identified by ICI as one of its growth businesses. Included on that list were engineering and electronic materials, food starch and the paints business in Asia.

ICI has to show this year that it can support the businesses in the portfolio, otherwise further cuts and divestments will be needed. Initially, all eyes will be on the announcement of the rights issue details on Monday 4 February but a great deal of attention will also be paid to how management expects the individual segments in the business to grow. Late last year, ICI was saying that its resilience underpins growth for the future but, of course, that has to be proved.

By: Nigel Davis
+44 20 8652 3214

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