INSIGHT: Degussa’s fate will be decided soon

19 December 2005 15:51  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--The Degussa story is likely to take another twist on Monday following expected board meetings of majority shareholder, coal group RAG, and 43% shareholder, energy firm Eon.

The direction is not difficult to fathom: RAG wants to clear the decks for a planned IPO (initial public offering). Eon has to divest its Degussa stake under the terms of an earlier agreement.

Analysts are suggesting that RAG could pay Eon between Euro2.6bn and Euro3.1bn ($3.1bn-3.7bn) for its Degussa stake. A ‘squeeze out’ of minority shareholders following such a deal would be likely. RAG had wanted to transform itself and move from coal to chemicals. Underlying its strategy, however, is the issue of coal subsidies paid over decades by the German government. Whatever twists the story takes, this is a clouded mix of politics, jobs and corporate ambitions.

On the sidelines now but perhaps soon to be key players in the drama are private equity group Blackstone and Germany’s chemicals giant, BASF.

BASF has expressed an unusually clear interest in buying Degussa’ construction chemicals business. It could pay between Euro1.8bn and as much as Euro2.5bn for the business. The world’s largest chemicals company is flush with cash and wants to move downstream. It also has to convince shareholders that it is spending money wisely. BASF wants exclusive talks with Degussa. The specialty company’s management remains coy and won’t comment. From various reports it appears that Blackstone would be willing to bid for any bits of Degussa RAG does not want.

In the only really concrete action so far, BASF says it want integrate further forward into construction chemicals, a $13bn market that is growing at about 4% a year. Adding Degussa’s activities to its own would open up new markets with potential and could add value – if the price is right.

It is difficult to see why Degussa would want to sell the business now but the company clearly is being driven hard by the wishes of RAG. BASF supplies chemical precursors to the construction chemicals industry, in particular, to formulators of construction chemical products. Its functional polymers are used in the business. The company also sells wood coatings and polyurethane (PU) systems used in the building trade.

The construction chemicals business of Degussa is a global  enterprise which last year produced a profit (earnings before interest and tax or EBIT) of Euro201m on sales of Euro1.8bn. BASF is clearly interested in the North American and Asian operations but the company has a considerable presence in Germany.

Degussa’s admixture segment businesses encompass new developments in concrete technology. The construction systems segment businesses supply products used in many types of building systems.

This year Degussa has underperformed and its prospects have frustrated RAG. Yet, the restructuring announced on 13 December should go a long way towards lifting returns and creating a more efficient organisation.

By: Nigel Davis
+44 20 8652 3214

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