Analysis: DSM-Roche deal leaves investors cold

06 September 2002 17:08  [Source: ICIS news]

NEW YORK (CNI)--Analysts are biding their time before passing judgement on an announcement from DSM for plans to buy the vitamins and fine chemicals unit of Roche, citing pricing pressure and low prospects for growth.

"Many in the investment community are not too optimistic about this acquisition because of the pricing pressure and the low growth prospects of this business," said Commerzbank Securities analyst Michael Vara.

He said: "I would call this a commodity business as it is hugely capital intensive with an assets-to-sales ratio of 1.2x. That is not a typical characteristic of specialties, and neither is the fact that you're able to acquire it without any goodwill (under book value)."

But Vara also said he believes DSM knows how to cut costs in a commodity business and could use that expertise to create value.

Despite the apparent cheapness of the acquisition, investors were impressed, sending shares of DSM down 4% in Amsterdam immediately after the announcement.

Building on a strategy aimed at growing annual sales to Euro10bn ($9.9bn) with at least 80% of sales from specialties, the Dutch life sciences and performance materials giant has agreed to pay Euro2.25bn for Roche's vitamins and fine chemicals division. It would mark the largest acquisition in DSM's history.

Roche announced plans to sell or spin off its vitamins and fine chemicals division last February after being fined Euro462m in November for its involvement in a vitamin price fixing scheme.

The acquisition agreement indemnifies DSM for Roche's present and future liabilities from the price fixing case.

In the global life sciences end market, the deal will make DSM a leader with Euro4.7bn in sales to the industry after the deal compared with less than Euro2bn for Degussa, the number two player.

And one London-based analyst said DSM's purchase price of Euro2.25bn seems about Euro1bn less than he estimated it would have to pay. He said this "well priced deal" removes the risk of a value destructive acquisition on the part of DSM - something that has caused investors concern.

Said Vara: "I think the acquisition price is about fair, given that margins have been coming down after the breakdown of the cartel. We now have a very competitive market situation."

Two big questions will define the immediate impact of the deal: Have margins stabilised? And, what will be the level of capital investment needed to run the business?

Vara predicts that a stabilised earnings margin of 14.5% will validate the price depending on the amounts DSM pays for depreciation. He said: "If they are able to push margins up to 18% like they are targeting, or even 16%, then it certainly would be a value-enhancing deal."

After the deal, DSM estimates it will have net debt of Euro1.21bn, representing debt-to-capitalisation of just 19%.

Looking ahead, DSM will continue to seek acquisitions with the next target in the area of performance materials. Assuming 4% growth, Vara said DSM would have an acquisition gap of around Euro600m to fill to meet its Euro10bn sales target by 2005.

(For additional Chemical Market Reporter analysis visit the CMR Web site at: http://www.chemicalmarketreporter.com/.)

By: Joe Chang, Chemical Market Reporter
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