12 March 2003 17:18 [Source: ICIS news]
The cracks at Clariant were starkly visible at the time of the annual results presentations about a fortnight ago when management indecision over a capital increase only served to heighten investor edginess.
At least the picture is clearer today (Wednesday) following the departure of chief executive Reinhard Handte, even though Clariant still has real problems that are not going to be resolved easily. The company carries too much debt and will have to prune hard in life sciences and fine chemicals where its strategy is in tatters. Handte’s replacement, former chief financial officer Roland Losser, knows the business intimately but will have to make his mark swiftly and cannot afford simply to be a safe pair of hands.
Investors are rightly annoyed that the company has been sending out the wrong messages this year and questioned whether management has been up to the job. They appreciated the upside of further restructuring in the early part of 2002 but the shares subsequently reacted negatively to weakening specialty chemicals markets.
Unfortunately, as recently as November, Handte was signalling that the bottom of the fine chemicals downturn had been reached. But he admitted at the annual results presentation to analysts on 26 February that Clariant had changed its mind and was not planning for a market upturn in 2003. He forecast tougher times ahead.
By creating a separate legal entity of the life sciences and electronics division, the company was signalling that the sale or spin offs of parts of the division could be expected. The write-down of the remaining goodwill from the BTP custom synthesis acquisition and the subsequent loss for the year highlighted the seriousness of the situation.
Certainly, if the fine chemicals (custom synthesis) business is as bad as suggested then something has to be done about it. Cutbacks will be needed but significantly more than the series of closures made over the past 18 months. Clariant was slow to react to the fine and specialty chemicals market downturn but seemed to be turning that tardiness to its advantage; yet it has demonstrated now how such indecision can be fatal.
Clariant faces significant pressures on a number of fronts and needs more than ever to focus on capital discipline across the business. Strategically, the company is also in a bind. The foray into custom synthesis has been expensive and debilitating. Downgrading the strategic importance of life science businesses, the company says, increases strategic flexibility but Clariant knows that it has to respond. Fully owned legal entities have been created for electronic materials, pharma, custom synthesis and masterbatches. The company says it wants to sell non-core businesses representing up to 7% of sales and make further operational cutbacks.
Clariant does not need a rights issue if it keeps its eye on cash. And analysts have suggested that although an equity increase would make debt reduction plans easier to achieve a rights issue in current market conditions would have a strongly negative impact on the share price. Given its battered prospects, Clariant needlessly courts further downward pressure on the shares. Management has to demonstrate now that it can move decisively in the right direction on a united front.
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