INSIGHT: Degussa under pressure to perform

13 October 2005 17:47  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Is Degussa, the world’s largest specialties producer, getting it right?

This year it will take the hit of its recent Euro830m ($1bn) write-down in fine chemicals and have to remind shareholders that the business is still caught in an overcapacity-driven bind. Is there no way out? Degussa probably does not want to sell – it is hardly an option in the depressed segment. So it has to ride out this extremely difficult period.

But frustration with Degussa is palpable. Grand plans by German coal producer RAG and energy group Eon to sort out their Degussa holdings were expected next year but look now as though they have been postponed. RAG, which holds a controlling 50.1% stake in the specialties maker, has pushed back its own listing from 2006 to 2007 while agreements to pay back coal subsidies dating from the 1950s are finalised with the new German coalition government. This hardly creates an ideal situation.

Degussa is the “undisputed pure-play specialty chemicals leader” according to ICIS’ own Chemical Market Reporter (CMR). The company was born out of the agglomeration of specialty chemicals assets and ultimately in 2001 the merger of Degussa-Huls with SKW Trostberg.

The merged businesses have been honed down in a relatively short period through the divestment of assets with sales of about Euro6bn but the question is still very much: where to next?

Some analysts want to see greater focus. While Degussa’s owners (RAG with 50.1% and Eon with 43%) have been happy to book their share of the proceeds from the asset sales – most recently Degussa sold its food ingredients business to Cargill for Euro540m ($650m) – an air of frustration has developed.

Degussa has a mid-term 2008 strategy, outlined earlier this year by chairman Utz-Hellmuth Felcht (pictured above right), that is focused on lifting sales growth and raising returns above the cost of capital. The company is built around five core business areas but there is pressure for more focus.

Degussa’s owners certainly want a better rate of return. RAG obviously wants to see Degussa’s value lift before its own listing. According to the RAG chairman and chairman of the Degussa supervisory board, Werner Muller (pictured above left), Degussa is RAG’s only underperforming business.

Eon needs a higher share price if it is to sell its remaining shares to RAG or release them into a free float. A float of those shares has been targeted tentatively at 2006. RAG has the right of first refusal to acquire the remaining Eon Degussa shares.

All this puts Degussa in a bind. The uncertain future ownership situation hardly helps as the company struggles to perform and pass higher raw material costs on to customers. Degussa got off to a slow start this year and performance has not impressed. The backing given at the time of the fine chemicals announcement on 5 October for earlier full year operating profits guidance could not prevent a drop in the share price.

Analysts and debt rating agencies are among those worried about how difficult it is going to be for Degussa to lift cash flows and improve profitability. The specialty chemicals business environment is challenging with structural change in several markets.

Management reaction in the short and medium term is key. Muller is disappointed with Degussa performance and with Degussa management. The one has to lift performance of the other. This is a challenging time for Degussa executives and the group.

(Additional reporting from Frankfurt by Dede Williams.)

By: Nigel Davis
+44 20 8652 3214

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