INSIGHT: RAG’s mixed messages rattle Degussa

07 December 2005 17:06  [Source: ICIS news]

By Dede Williams

Frankfurt (ICIS news)--Majority shareholder RAG’s plans for Degussa continue to create uncertainty for the specialty chemicals producer, which bills itself as the world’s largest.

A leading German regional newspaper, Westdeutsche Allgemeine Zeitung reported on Tuesday that RAG has been talking with a large private equity company about selling Degussa. This follows last week’s contradictory reports that RAG, which currently holds 50.1% of the specialty chemicals group, is mulling the acquisition of all of Degussa – the other major shareholder is energy conglomerate Eon with 43% – and might seek to sell some assets such as building chemicals or fine chemicals to finance the purchase. Either way Eon wants out.

None of the companies thus far have been willing to comment on the rumours. But Degussa’s management is believed to be particularly unhappy about the confusion and tension within the workforce is palpable.

At an out-of-turn general assembly last week, the works council called on management to “safeguard the substance” of the group and discuss with employees any changes that would affect jobs.

RAG’s plans for an initial public offering – which, according to chairman Werner Müller, could take place in 2007 – are prompting the group to realign the asset base.

A sale of Degussa would contradict RAG’s initial plans to secure its future by exiting coal mining and making chemicals an important pillar of operations. But then, in this saga, contradiction and obfuscation is not unusual. One day it looks as if RAG wants Degussa and on another it does not. 

Some observers see this as a poker game, caught in German and corporate politics, although few seems to know what the rules of the game are.

Only 7% of Degussa’s shares are currently in free float and its total market value is estimated at Euro3.5bn ($3.0bn). The chemical producer had hoped Eon’s exit would provide an opportunity to increase the free float and return it to the DAX indicator of the top 30 German companies.

Over the past year, Degussa has been overrun by consultants. First McKinsey put in 40 to 50 of its staff at the behest of RAG. Its study formed the basis of the ‘Degussa 2008’ corporate review that targets an operating profit (EBIT – earnings before interest and tax) of Euro300m. The Boston Consulting was brought in by Degussa chairman Utz-Hellmuth Felcht. 

Degussa has not been doing well. In the first nine months of the year EBIT was up just 2% at Euro738m on sales up 8% at Euro8.7bn. Fine chemicals have been a bind and the company was forced to take a write down of Euro836m on the business in the third quarter. Alongside the rest of the European specialty chemicals industry the company is struggling with lacklustre growth coupled with the burden of high raw material and energy costs. Long-term businesses are threatened by increased competition from Asia.

On 13 December, the Degussa supervisory board is due to review the Boston Consulting Group’s recommendations for a new strategy five years after the 'new Degussa' was pieced together from the previously merged Degussa-Hüls and SKW Trostberg.

This review reportedly suggests far reaching change including significant asset sales – of the construction chemicals and the fine & industrial chemicals divisions. At the same time there is talk of a sweeping management shake-out in the second tier. In early November, Degussa chairman Utz-Hellmuth Felcht, admitted the two programmes could lead to “major structural and personnel changes”.

Running to the close of a difficult year, speculation surrounding Degussa is confusing everyone and upsetting shareholders and employees alike. Degussa needs a clear plan and to show that it is producing the right chemicals for the right market. 

Unfortunately, in the current environment, both Degussa mangement and its two major shareholders seem to be preoccupied with whose plans is best for the beleaguered specialty maker rather than just getting the job done.

Additional reporting from Nigel Davis in London

By: Dede Williams
+44 20 8652 3214

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