Analysis: New ISP focuses on alliances, bolt-on buys

18 April 2003 17:00  [Source: ICIS news]

NEW YORK (CNI)--Newly privatised in a $134m (Euro123m) buyout of minority public shareholders, International Specialty Products (ISP) is moving forward as an $850m specialty chemical company focused on pharmaceutical ingredients, personal care and performance chemicals.

ISP dodged the pitfalls of pricey acquisitions during the recent heyday of mergers and acquisitions (M&A's) heyday and the temptations of investing in large capital projects. Now the company can look instead to increase its number of alliances with small strategic and opportunistic acquisitions.

"We have no ambitions to become a $2bn company in specialty chemicals," said president and chief executive officer Sunil Kumar in an interview with Chemical Market Reporter.

He said: "We want to maintain our earnings before interest, taxes, depreciation and amortisation (Ebitda) margins and expand in key areas."

In 2002 - not the best of years in the chemical industry - ISP generated $185.4m in Ebitda for an enviable margin of 21.9% on sales of $845.3m.

Kumar sees no disadvantages in running a private chemical company. ISP already was a quasi-private company with ISP chairman Samuel Heyman owning 81% of the shares before the buyout.

Said Kumar: "The whole idea of going public was to be able to enjoy a good multiple on earnings, which would create a currency we could use to do other things. But the stock market does not value small chemical companies and does not differentiate between high and low quality assets. We also had a very limited float and an investment portfolio inside the balance sheet of the company. So naturally we did not enjoy a good multiple."

In its privatisation, ISP did not assume additional debt. The company has net debt of around $600m on the chemicals side, an amount Kumar described as "quite low for the amount of cash flow we generate."

The company also has net assets of about $350m in its investment portfolio, which is run separately by Heyman and includes a 9.1% stake in Hercules.

Standard & Poor's (S&P) has assigned ISP a speculative grade corporate credit rating of "BB" with a negative outlook.

ISP has a two-prong strategy for organic growth. The first involves developing new products from its current portfolio of chemistries.

Said Kumar: "Our current chemistry has a lot of juice left. We've introduced 17 new products this year, and while they're not blockbusters, they are all new in the eyes of our customers. Sometimes it's old wine in a new bottle, but customers view it as an innovation that will enable them to roll out another new product."

At the same time, the company's second source of growth involves adding products and technologies through alliances. ISP has struck 14 new alliances since January 2002 with various companies in areas such as amino acids and cyclodextrins for use in pharmaceuticals and MCC (microcrystalline cellulosic) silicones for personal care applications.

Kumar explained: "The approach is to form alliances with other companies which we can convert into solutions for our customers by selling to and servicing them. It's not simply about taking their formulations."

He said: "The mere description of a molecule is useless to a customer in our business model. We have to show them that the molecule can make their hair spray stick better and give a softer hold, or for skin care, enable a higher level of Vitamin E absorption. Rather than counting on one or two mega projects, we have many small projects adding up to a very good picture."

Last October, ISP signed a strategic alliance with BioCatalytics to manufacture a new class of pharmaceutical building blocks known as beta-amino acids. The alliance enabled ISP to expand its pharmaceutical capabilities beyond synthetic active pharmaceutical ingredients, intermediates and cryogenics, and into biotechnology.

More than half of ISP's new alliances are located in Asia.

Kumar said: "Much of this has to do with sourcing materials, but they are not typical vendor/customer relationships. These are marketing arrangements with a clear definition of who will do what part of product development. In areas such as food and digital photography, we are in alliance with a company in Asia which is actually developing a product for us."

ISP sells any product coming out of its alliances under the ISP trade name.

Areas with the highest organic growth potential for ISP include pharmaceuticals ingredients and personal care. But ISP consider the category of performance chemicals a wild card where growth is likely to be achieved through acquisitions. ISP defines that group as specialty chemicals not applied to the human body. Examples include digital photography coatings, household cleaning chemicals and agricultural chemicals.

Said Kumar: "There could be significant additions in performance chemicals like our acquisition of Degussa's biocides business. We have not lost a single employee in that business and have found all kinds of opportunities to add to the product line. It's exceeding all our sales and profit expectations, and with over $30m in sales, was a good size for us."

And further acquisitions are in the works.

Kumar said: "We would love to look at adhesives, coatings, household cleaning, and even printing, but only on the specialty side. If it's a strategic acquisition such as biocides or alginates, and we have a few small ones in the hopper, we recognise that we will have to pay a strategic price for it."

ISP's external growth plan features a number of small bolt-on acquisitions and alliances.

Kumar predicts: "Five years from now, everyone will be surprised at how strong a contribution these alliances have made."

ISP's offer to acquire synthetic rubber manufacturer Ameripol Synpol out of bankruptcy came as a bit of surprise since the business is commodity-oriented and has no overlap with ISP's operations. But ISP considers its offer for Ameripol Synpol, which is still on the table, a potential opportunistic acquisition.

ISP's criteria for opportunistic acquisitions are financial attractiveness and room for operational improvement.

Elaborating on Ameripol, Kumar said: "Although this proposed acquisition is not strategically relevant, we believe we can improve the operations a great deal. It will take over $25m to modernise the plant along with process expertise. We have a major manufacturing site near this plant in Texas City, Texas around 150 miles away, and we would use that organisation to upgrade the Ameripol plant."

While a number of chemical companies are renewing their focus on portfolio restructuring, ISP is comfortable with its current mix. Though the company is not putting any of its businesses on the block, it would be open to attractive bids for its mineral or industrial butanediol business.

In fine chemicals, where companies have had their share of failure, ISP has consolidated most of its activities into two plants - at Columbus, Ohio and Freetown, Mass.

Explained Kumar: "The plants have some select capabilities, such as cryogenics, and we deal only with a few customers. We are not competing with Rhodia, DSM or Lonza. We have a targeted approach that's slow but profitable."

In mid-2001, the company acquired FineTech, a research facility in Haifa, Israel. Then, unable to execute its fine chemicals strategy effectively, ISP sold the plant in April 2002 for $32m, booking a gain on the sale.

Said Kumar: "Fine chemicals is not an area where we have been tremendously successful. Fortunately, we did not make any big investments there."

ISP has decided to focus on select fine chemicals opportunities in pharmaceuticals as well as inks and dyes.

Kumar said: "Once we made this clear decision, it enabled us to take the Columbus plant and focus it on inks and dyes, killing a dozen projects in fine chemicals. It also gave us the opportunity to convert that plant into making base specialty chemicals for uses in hair care and digital photography coatings."

While ISP continues to look at ways to reduce costs, cost reduction is secondary to revenue generation.

The company is opening up new technical centres in Mexico and India this year or next to service its growing customer base, and will double the size of its research and development (R&D) centre in Shanghai, China. Capital expenditures in 2003 are expected to run near last year's level of $60m and employment likely will rise by 5-10%.

(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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