INSIGHT: Europe producers chase the value trail

12 June 2007 16:36  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--ICI’s share price climbed again on Monday on further bid speculation. The increase was not spectacular but underlined the fact that the company is seen by many now as desirable property.

The same can be said for other chemicals assets in Europe. The big question is who is prepared to pay for them?

Deep pockets will be needed if recent chemicals acquisition multiples are to be matched. The industry is at the top, or close to the top of its cycle; a commodities downturn beckons although is by no means certain.

Specialties makers would be hit if their feedstock costs fell causing them to suffer further product price erosion. On the positive side, demand is holding up and growth forecasts for the sector as a whole look good.

But just how will Europe’s chemical firms capture the growth they need to thrive if not survive in the sector?

Producers from ICI to Clariant and Degussa have been put in the acquisition frame over the past 12 months, mentioned alongside the likes of Akzo Nobel, Lanxess and chemicals giants BASF and DuPont.

Chemicals management is in something of a dilemma, however. Well versed in the mantra of profitable growth and frightened of value destruction, managers are treading carefully. The sweet deal is increasingly elusive.

Potential acquirers have to be bold and be creative. Think Linde and BOC.

Lanxess’s Axel Heitmann was playing a political game last month when he expressed his interest in RAG’s Degussa. He was quoted this month as saying that Clariant was expensive, his attention having reportedly shifted when it became clear that RAG was determined to go ahead with its IPO (initial public offering) of Degussa and its energy and real estate assets.

The coatings market is attractive and ripe for consolidation, so cash-rich Akzo Nobel – following the sale of its human and animal healthcare businesses – has been widely expected to make an approach to ICI.  Other coatings groups have been said be on its radar screen.

But if it is shareholder value that is being sought, share buybacks hold a commanding position. European coatings producers talk of wanting to seek out small bolt-on acquisitions but these have appeared few and far between. The management of at least one European company, DSM, is aggrieved that it is being expected to push ahead with share buybacks when it resolutely believes in the industrial logic behind acquisition-led growth.

Part of the problem is that specialty producers of all kinds in Europe find themselves running up against a brick wall.

Big European once-specialty players like Ciba, Clariant and Rhodia have become ‘semi-commodity’ makers. There is nothing inherently wrong with that. It is just that the businesses have to be managed differently.

Industrial growth and, indeed, development is fast moving east. China not only demands new and more sophisticated chemicals but is making them. Not for nothing do some industry participants talk of China’s great wall of patents.

Making specialties in China has been difficult; selling them into China is becoming increasingly so.

In Europe, customers like the major consumer product groups seem increasingly unwilling to pay for product innovation. The chemical industry’s innovation drive is being squeezed on a number of fronts.

Investing heavily in European chemicals then becomes increasingly difficult to justify in value terms. But some will see opportunities where others do not: to buy more market share, key technologies, assets and personnel. These investors include private equity which with the right support can make businesses work.

Bain Capital, for instance, this month indicated that it was looking to sell paints producer SigmaKalon.

The second largest seller of coatings in Europe after AkzoNobel has flourished under Bain’s ownership.

Current management would rather the company went to a secondary private equity buyer or partially to another financial investor rather than to an industry player. Industrial independence appears to have worked.

Europe’s chemicals players want the freedom to carve industrial strategy as well as the freedom to invest. The two should, but do not necessarily always go hand in hand.

In the current high priced chemicals market, real value becomes increasingly difficult to find. There are juicy assets out there. Some of them are for sale. But the price is not necessarily right.

By: Nigel Davis
+44 20 8652 3214

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