INSIGHT: BASF targets stronger, less cyclical growth

04 January 2006 17:00  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--Will 13 prove to be a lucky number for BASF? Luck may not come into it but the German giant wants to make the Engelhard catalyst businesses, which it is pushing hard to acquire in a hostile $4.9b takeover bid for the group, its 13th operating division.

BASF is already big in catalysts and it wants to get bigger. And, it must be remembered, it wants to get closer to important customers.

Engelhard has to be attractive in that it would give the chemicals giant access to the fast growing auto catalysts markets. This is projected to expand at more than 5% a year over in the medium term. A successful deal would make BASF the global number one catalysts maker take it closer to auto giants like Ford, GM and DaimlerChrysler.

At the same time it would enhance its process catalysts technology position giving it access to different technology platforms. This means the sort of refinery catalysts that will be used increasingly to treat different types of crude oil and catalysts for gas to liquids (GTL) technologies. Soaring oil prices mean it is now worthwhile to process very sour and even highly acidic crude. Engelhard has an exclusive agreement to supply catalysts for Sasol’s two major GTL projects.

The bid is hostile, which is unfortunate given the premium BASF is prepared to pay, but hostile bids are not uncommon in the US. However, this is new territory for the big German chemical company.

But new territory is exactly what BASF needs, although in a different sense. The company, alongside its peers, struggles with growth. It has focused on its much vaunted Verbund integrated manufacturing structure and sought regional growth – in China in particular. Investments in oil and gas have proved to be among the most prudent it has ever made.

But mainstream chemicals and plastics offer varying prospects with precious little certainty. That is why BASF’s name has been linked with industrial gases group BOC – a rumoured approach ultimately categorically denied by BASF chairman, Jürgen Hambrecht.

It is no secret that BASF has been looking hard at how it might grow through acquisition and how it might reduce the chemical sector's inherent earnings cyclicality. A number of companies have been in its sights. Alongside this bid it is seeking exclusive negotiations with Degussa to buy that company’s construction chemicals division.

Simply bolting on new businesses, earnings and growth, however, are not sufficient. It is telling that BASF is not making any argument about achieving cost-saving synergies with this deal. There is little overlap with existing operations. Engelhard customers, however, are exactly the ones BASF wants to cultivate for its plastics and coatings business. It wants to focus more on services and the sort of packages that will help it tap into the success of giant partners that sit much closer to the consumer.

A lot can be read into the bid approach. It reflects confidence from management that it is possible to step out of old shoes and into something new. It also signals strengthened interest in the US, a part of the world in which BASF has had difficulties in the recent past.

BASF now has to manage the bid well. It has to be confident in not only the substance of the offer but also with how it is made – even enhanced – and the sort of messages it wants to get across to investors and the media.

BASF wants to act quickly and could run into difficulties if negotiations are protracted. Engelhard is said to have a complex poison pill that could lead to the board blocking the bid. Yet, the 10 largest shareholders hold 50% of the stock.

Reaction so far has been largely positive but Engelhard board has so far remained silent. It is not known yet when it will meet and what its recommendation to shareholders might be.


By: Nigel Davis
+44 20 8652 3214



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