INSIGHT: BASF will help Ciba businesses grow

15 September 2008 17:04  [Source: ICIS news]

By Nigel Davis

LONDON (ICIS news)--The long-term perspective has been lacking at Ciba Specialty Chemicals in recent years, but BASF can change that.

The chemicals giant sees strong synergies in plastics additives and coating effect chemicals, two large parts of the Ciba portfolio, and Ciba’s increasingly global reach, as reasons for its $6.1bn bid for the Basel, Switzerland-based specialties group.

The companies’ joint water and paper treatment chemicals operations also might be better managed to deal with slower growth and, particularly, paper industry pressures after the deal goes through.

BASF is offering an attractive premium to Ciba’s shareholders who have seen their holdings plunge in value as the specialty chemicals maker has slipped deeper into trouble.

The rumours were circulating last week that Ciba and Clariant might be attractive bedfellows.

Ciba had also just struck a plastics deal in Saudi Arabia suggesting, for some, the prospect of tempting Middle East investment in the struggling firm.

But BASF was emerging as a potential partner.

The companies say they began talking a few weeks ago. Ciba chairman Armin Meyer had not wanted to offer up his company’s independence but, really, the writing was on the wall.

Mid-sized speciality chemical makers are caught in a particularly difficult place. Ciba has seen its suppliers and customers grow while it has been forced to shrink. Some are now 10 times its size.

At the same time, important markets have moved to Asia and competition from Asia-based players has increased markedly.

Ciba has struggled to push sales volumes while it has battled with much higher oil-based feedstock costs and with seemingly ever higher energy costs. And it has not been easy to cover these and other costs with higher product prices.

BASF is able to swallow Ciba relatively easily but the acquisition terms must still meet the chemical giant’s strict acquisition criteria.

The deal is expected to be accretive to earnings two years after completion and was well received by the market on a difficult day following the Lehman Brothers' collapse.

BASF will be able to restructure the acquired businesses although it cannot say much now about how it might do that. It has yet to see in detail what it might be acquiring.

But given the company’s ‘verbund’, its giant matrix-style structure, there should be room for synergies not simply in the service and centralised management functions.

Ciba brings with it a not-inconsiderable and widespread geographical presence in its key markets. It will form a new division within the BASF performance products segment and represent about 7% of sales of the combined groups.

BASF expects to achieve a substantially improved market position in plastic additives, coating effects materials and the water treatment and paper chemicals businesses. These are well run.

It should be able to accelerate growth and the earnings potential of these operations as it links them more closely with its own. Ciba’s plastics additives fill a strategic gap in the BASF plastics industry portfolio.

It is the world’s largest producer of light stabilisers and antioxidants and, BASF says, renowned for its product innovations and strong global marketing.

The Ciba coating effects businesses increase BASF’s market breadth and scale. Complementary coatings technologies are expected to drive growth in such areas as water-based and UV-coating products.

The combined groups’ paper chemicals businesses will be big yet ripe for restructuring in the face of low market growth and higher costs.

Ciba’s solution-oriented approach to business also might be expected to complement BASF’s increasingly market-facing approach.

The combination can give greater impetus to Ciba’s research in areas such as colour, separation rheology and protection and stabilisation, and its strong applications know-how.

Within BASF the businesses - and the technologies - will have room to grow and to achieve a potential that was becoming much more difficult to find.

Ciba’s recent history has not been that happy and necessary retrenchment has put unnecessary pressure on some good businesses. These should be able to flourish as part of a much larger group.

($1 = Swfr1.11/€1 = Swfr1.60)

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By: Nigel Davis
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