25 November 2002 00:00 [Source: ICB]
Small is beautiful, or so the saying goes. It has certainly held true for M&A activity in the European chemicals sector this year, which has been characterised by the small deal.
Many of the deals have been led by venture capital companies or private equity houses. These have identified potential in a range of assets which have been put on the market by major players as they strive to focus on their core competencies.
US-based Bain Capital is one of the venture capital firms involved this year, making its debut into the chemicals sector with somewhat of a dash. In short succession recently it has purchased SigmaKalon, Atofina's coatings business, Rhodia's intermediates assets in France and a stake in Celanese's oriented polypropylene unit, Trespaphan.
Swedish private equity fund EQT has also backed two acquisitions recently. It bought Bayer's flavours and fragrances subsidiary, Haarmann & Reimer (H&R), as well as H&R's rival Dragoco. EQT is merging H&R, the market's fifth largest player, with Dragoco, the number eight, to create the world's fourth largest flavour and fragrances company with 11% of the market, behind International Flavors and Fragrances, Givaudan and Firmenich.
In contrast to last year, the pharmaceuticals sector has seen little activity in 2002. The major exception to this, however, was Pfizer's announced acquisition of Pharmacia in July. The takeover - which valued Pharmacia at about $53bn - will create a pharmaceuticals giant with a turnover approaching $50bn, nearly twice the size of its nearest rival, GlaxoSmithKline, itself only formed in January 2001 from the merger of Glaxo Wellcome and SmithKline Beecham.
The megadeal has not signalled a rush of M&A activity in the sector, although observers have pointed to Bristol-Myers Squibb, Schering-Plough and AstraZeneca as possible future targets.
Indeed, Germany's Bayer is still struggling with its strategy for pharmaceuticals. This month it gave up the fight to keep the business independent and abandon efforts to hold the majority stake in any joint venture (jv). This is a major shift in strategy for the company, and the market responded positively to the news with Bayer's share price soaring.
But Bayer needs a solution quickly as it is still reeling from the withdrawal of its anti-cholesterol drug Lipobay/Baycol and resulting lawsuits that total over 7500. There is unease that the number of claims will balloon and the company has not set aside separate funds. In addition, there appears to be little promise in its near-term research pipeline.
In biologicals, Bayer has suffered from production problems but, on a more positive note, the company has formed a jv with Aventis Behring. The two are combining their blood plasma products worth $3.4bn in a partnership where Bayer will hold a substantial majority stake and exercise management control.
Other deals in the pharmaceuticals arena include Degussa's sale of its Viatris business to private equity firm Advent International for $345m and Novartis' successful bid for the Slovenian generics firm, Lek. Schering has also made some strategic moves this year with stakes acquired in German biotechnology firm MorphoSys, and France's Areva. It has also bought Collateral Therapeutics in the US.
The agrochemicals business has been host to plenty of deals and Bayer has been particularly busy here as it continues with its restructuring programme. Final completion of its $6.8bn acquisition of Aventis CropScience mid-year propelled Bayer to second from seventh place in the E33bn crop protection market, behind Syngenta and ahead of DuPont and Monsanto. The new company, Bayer CropScience, will be ranked globally first in insecticides, second in fungicides and third in herbicides.
As a condition of approval in the European Union and North America, Bayer has to divest businesses in the US and Canada. This month saw the sale of its fipronil insecticide and a range of seed treatment fungicides to BASF for $1.18bn, moving BASF from fourth to third in world agrochemicals. Bayer's household insecticides portfolio is being sold to SC Johnson for $734m.
Two deals have been agreed within the last few months with Israel's Makhteshim-Agan. The Israeli company has bought the right to sell or license crop protection products worth $86m and followed this up with the purchase of Bayer's crop protection products for $53m.
Other moves in agrochemicals include the sale of SKW Piesteritz, Degussa's fertiliser subsidiary, to Czech agrochemicals company Agrofert and Swiss trading firm Ameropa. Norsk Hydro has sold a large stake in Hungarian producer Nitrogenmuvek to a domestic investor and has formed speciality fertiliser jvs with NutriSI in Belgium and SQH in Chile.
Finland's Kemira, however, is still seeking a buyer or major partner for its fertiliser business which remains a drag on its income.
The focus on speciality and fine chemicals has dominated several players this year as they divest non-core operations and move away from the cyclical nature of petrochemicals. Having finally shed its petrochemicals assets to Sabic, DSM spent the money on buying Roche's vitamins and fine chemicals business for $2.2bn, shooting it to the world's number one spot. The deal, still subject to anti-trust approval, was met with a lacklustre response from analysts who felt that vitamins were not truly speciality but virtually a commodity with low growth rates worldwide.
Solvay made its largest-ever purchase when it handed over E1.3bn for Italian fluorinated specialities producer, Ausimont, doubling its business in this area to $818m. As a condition of the deal, Solvay must sell Ausimont's hydrogen peroxide and persalt activities in Bussi, Italy (which are widely tipped to go to jv partner Degussa), and its polyvinylidene fluoride assets in Decatur, Alabama, US. These went to 3M subsidiary Dyneon.
Lonza has had less success in its aim to become a pure life-sciences company. Two attempts to sell its polymer intermediates business have failed this year with the company unable to get the price it wanted from the venture capital firms involved. Lonza said the deal values did not adequately reflect the division's performance and future prospects. It has decided to keep the business pending any future exit strategy.
The recent sale of former chairman, Martin Ebner's 19.8% stake in Lonza raised speculation that a strategic buyer would emerge but these fears were eased when the shares went to institutional investors.
Several moves have taken place in the speciality sector where Akzo Nobel has been a key player. Its purchases have comprised the industrial surfactants business of US firm, Crompton; the US and Asian powder coatings operations of Ferro; French paint distributor Jouanne; the marine and aerospace businesses of Japan's NOF; a coatings plant in South Korea and a 50% stake in a Mexican producer.
Clariant is also selling its European emulsions and global emulsion powders business to Celanese for $143m. The deal excludes a business in Japan and a jv in Portugal.
Celanese's core product is vinyl acetate monomer which is the key raw material to produce emulsions and the new business will be integrated into its acetyl products division. This move is part of Celanese's aim to move downstream in a bid for protection from the volatility of end-user markets and should provide 'some level of transfer pricing synergies'.
Petrochemicals has been sluggish in terms of M&A, although the big deal here was Sabic's $1.96bn purchase of DSM's operations. The impact of this acquisition on the marketplace has possibly yet to be felt but certainly gives the Saudi Arabian major a long-awaited foothold in Europe.
DSM has given Sabic significant polymers sales and marketing potential in Europe and a valuable R&D and licensing organisation. The purchase propelled Sabic to third and fourth in global polyethylene and polypropylene markets, respectively, and boosted it to number 11 from 22 in world petrochemicals.
The deal spelt the end for EniChem's hopes though, with Sabic terminating talks shortly after the agreement with DSM. Negotiations collapsed mainly because of environmental problems at some of Polimeri Europa's plants, in particular at Gela, Italy.
Parent company Eni has been trying to exit chemicals for some time and had shifted its non-core chemical assets to subsidiary Polimeri Europe in preparation for the sale of a 51% stake in the division. Observers believe potential buyers are likely to be non-European, as most domestic players have sufficient capacity in the region. Several sales, breaking up the company, are now most likely.
Both Shell and BP's respective acquisitions of Germany's DEA and Veba were finally approved by the European Commission early this year. Concerns on the companies' potential stranglehold over the ethylene market on the ARG pipeline were swept aside by separate commitments from both parties. Shell is granting third party access to its import terminal and BP is selling shareholdings in the pipeline to BASF and Sasol Germany.
The other noteworthy deal in petrochemicals was Ineos Oxide's purchase of BP's butyl and isopropyl acetates business. Private company, Ineos, has been steadily buying up European assets in recent years and said this latest acquisition fitted with its expansion strategy.
One of the more complex, and still outstanding, deals of the year is the E.On/Ruhrgas/RAG/Degussa debacle. The Commission is still investigating plans by RAG to take a major stake in Degussa from energy group E.On, in exchange for RAG's 18% share in gas distributor, Ruhrgas.
RAG and E.On now hold 46.5% each in Degussa. The company has lost its DAX30 index listing on the German Stock Exchange, which regarded the remaining 7% free float as too low. The RAG purchase of Degussa has been cleared but plans by E.On to acquire Ruhrgas are still delayed by competitors' complaints which are due to be heard in a second round in court on 12 December.
No doubt, many more M&A moves hover in the shadows as the economic outlook continues to be depressed. There is little optimism that business conditions will start to improve until much later next year and companies remain under pressure to improve their balance sheets. Private buyers will thus have plenty of opportunity to continue their shopping activity over the next 12 months.
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