04 September 2002 18:45 [Source: ICIS news]
The vitamins business is not what it was, that much is sure; so how will DSM fare in this increasingly competitive segment? The Dutch company, of course, thinks its Euro2.25bn ($2.21bn) deal with Roche is a good one. It has paid an attractive price to put it top of the world vitamins league table. Vitamins growth rates are tempting but that very fact has created a tough competitive environment driven by new players in China. Established vitamin producers have been faced with steeply falling prices and dramatically slowing rates of return.
The fall in DSM’s share price yesterday reflected shareholder concern. DSM has undoubtedly bought a good business but it won’t return to earlier heady days. This year alone, Roche has seen its vitamins, carotenoids and fine chemicals (VC&FC) division suffer badly from lower vitamin prices and negative currency effects. Operating profits (in the first half) fell from Euro149m to Euro95m and the operating margin from 12.5% to 8.0%. In 2001 operating profits fell 30% on 2% lower sales. Since 1997 EBITDA (earnings before interest, tax, depreciation and amortisation) margins have fallen from 29.9% to 14.7% (in the first half of 2002).
Roche expects a better performance in the second half of this year but the vitamins business, in which it has number one position in something like 70% of the sector, is battling the effects of aggressive production growth in China and falling prices. Some important vitamins, such as vitamin C, have rapidly assumed commodity status. Vitamin E is the largest of the vitamins markets with a global sales value of more than $1bn a year. The markets for vitamins A and C are worth about $500m a year each.
DSM will only pay just over one times sales for the Roche business and is in the process of striking a deal that excludes any liability associated with the Euro462m fine imposed on Roche last year by the European Commission for being an instigator and participant in vitamins price fixing cartels from 1988 to 1998.
Roche put its VC& FC division up for sale late last year and although there had been talk of a possible trade sale, a great deal of attention has been on a financial buyer or on a possible spin out of the unit. About 50% of the division’s sales are of vitamins while fine chemicals makes up 30% of turnover and carotenoids 20%.
Vitamins are among the fastest growing food additives and DSM clearly has its eye on the future for ‘nutraceuticals’ and other higher margin niche markets. And while sections of the business commoditise fast DSM will need to tap into what it calls but has not closely identified ‘significant integration and innovation potential’. DSM is not likely to be able take costs straight out of the business because there is little overlap with existing operations but it will be looking to enhance current growth rates. Vitamins in animal feed have grown globally on average between 2% and 3% a year and in the pharmaceuticals and food markets at between 4% and 5%.
The acquisition, which is unlikely to be completed until the first quarter of 2003, will give DSM the life science products boost it needs following divestment of petrochemicals. In particular, the combined DSM life science products businesses and Roche’s VC&FC businesses are well placed in the emerging markets for nutritional ingredients, functional foods and feed ingredients.
Adding DSM’s life science products sales of Euro2.3bn to the Roche division creates a new segment for DSM with sales of Euro4.7bn split 32% in pharmaceuticals and human health, 29% in animal nutrition and health, 30% in human nutrition and 3% in cosmetics. The acquisition would lift DSM annual sales to Euro8.0bn and closer to its Euro10bn ‘Vision 2005’ target although DSM has suggested that it wants make smaller acquisitions in performance materials to help achieve that goal.
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