Degussa deal breeds damaging uncertainty

23 May 2002 18:42  [Source: ICIS news]

The Degussa story now is producing more questions than answers.

Majority owner German energy company E.on had to broadcast the fact early on that it needed to divest chemicals to fulfil its energy ambitions at the time of the company’s takeover of UK electricity company PowerGen. That hardly engendered confidence among Degussa employees.

The complex deal announced earlier this week in which German coal and chemicals group RAG will buy a 50.1% stake in Degussa and E.on will buy RAG's 18.4% holding in Ruhrgas will, unfortunately, have done little to boost confidence either.

Degussa’s senior management has done a good job drawing together a set of disparate chemicals businesses and given the company much greater coherence. But, in some circles, it is still perceived as an agglomeration of chemicals assets which has yet to find focus. Elsewhere, particularly among some US specialty chemical makers, it is seen as being of the size, and scope, to make it big in the sector.

Break up now would be disastrous. The company has shown that it can focus and that it can perform in difficult times. A new Degussa image has been created; a stronger, new Degussa culture will follow. It is encouraging to hear management talk of growth – both organic and acquisition-led – as well as the drive for greater across the board efficiencies. Given the chance to do their job well they have every chance of success.

The Degussa chemicals portfolio has to change and be more sharply focused, there is little doubt of that. Indeed, alliance led growth that might include a few speciality chemical sector surprises could well be on the cards.

A great deal has been done in a relatively short period to help sharpen the portfolio and divestments have been made faster than many believed possible. Now, Degussa has to grow.

Management has already confirmed its interest in Bayer’s flavours and fragrances company Harmann & Reimer. The winner in the bidding for Harmann & Reimer will be announced soon, but Degussa has to play its part in the next round of merger & acquisition activity in the specialty chemicals sector. What Degussa does not need now is an unsympathetic owner. It is a company that needs to be nurtured through what is still a youthful phase in which it has yet to find its feet.

RAG has said that it would preserve the integrity of Degussa – that is if the country's Economics Ministry ignores advice from the Monopoly Commission and allows the E.on/RAG deal to go through.

RAG, which owns the coal chemistry-based specialty chemicals producer Rutgers, has said before that it wants to strengthen is specialty chemicals activities and reduce its reliance on coal. RAG publicly has given its support to Degussa’s restructuring efforts and its focused strategy for growth. Synergies between Degussa and Rutgers are not driving forces for the planned takeover and there is little overlap in the portfolio but greater co-operation is more than a possibility.

Unfortunately, what is unlikely now is any great degree of clarity in the situation. Degussa’s share price has risen over the past few days as news of the E.on/RAG deal has been revealed. But there is so much uncertainty that it is difficult to asses whether the deal is likely to go through let alone what the possible new owner would want to do with its newly acquired position in specialties. Sadly, the longer uncertainty persists the more difficult it will be for Degussa management to maintain motivation and morale and fulfil their current ambitions.

By: Nigel Davis
+44 20 8652 3214

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