25 November 2011 15:33 [Source: ICIS news]
By Nigel Davis
LONDON (ICIS)--Pressure on European vinyls players is intense. Downstream construction markets remain weak and the prospects for growth are poor. The phase-out of mercury-based production puts pressure on chlor-alkali cell rooms across the region.
Consolidation is needed but cannot be achieved easily given steep environmental liability costs. There are deep concerns over electricity prices which will rise as the EU tackles its climate change goals and countries such as Germany step away from nuclear power.
But what of France and the assets that Arkema this week said would transfer to the hardly widely-known Klesch Group?
Klesch is different in that it specialises in taking on cyclical and high-cost commodity industrial businesses sometimes operating in difficult regulatory environments. “We are prepared to absorb and manage the volatility risk inherent in commodities businesses as well as longer-tailed risk, such as environmental and pension liabilities,” it says.
The €1.1bn ($1.5bn) turnover Arkema's vinyls business will give the Switzerland-headquartered, family-owned, investment group a chemicals arm to add to its activities in oil, gas, marine transportation and aluminium, backed by its commodity and energy trading activities. Klesch currently turns over more than $6bn a year and, apart from the vinyl acquisition, is lined up to acquire a refinery from Total on the east cost of the UK.
Owner and founder Gary Klesch, who made his name in some controversial, high profile deals in the 1980s, has said that €70-80m will be invested in the Arkema vinyls activities over the next two to three years.
Klesch suggests that it won’t be making big cuts in the business but will look for synergies with its industrial and trading activities.
Klesch owns one of Europe’s largest aluminium smelting businesses, Netherlands-headquartered BaseMet, so knows all about electrolysis. In 2010 it acquired the Heide refinery and chemical operations in Germany from Anglo-Dutch oil giant Shell and is a producer of ethylene in its own right.
Gary Klesch told France’s La Tribune newspaper this week that he did not expect the vinyl assets to return to profit in the near term. But he said the synergies within his group companies could mean that the business is better placed competitively against sector leaders in Europe, Solvay and INEOS.
According to the report, Klesch also believes the operating environment in France is attractive, given the country’s focus on energy independence and nuclear power.
Klesch has been active during the past year eyeing the Arkema vinyl assets and also looking at Total’s Lindsey oil refinery. Press reports earlier this month suggested that a deal on the third largest refinery in the UK was close to being finalised.
“We are delighted to announce this agreement with Arkema to acquire its Vinyl Products division, Gary Klesch said in a statement on Tuesday. “This acquisition provides the Klesch Group with a new growth platform and one which complements its existing operations. One of the key attractions of Arkema’s Vinyl Products business is the expertise of its management and the dedication of its staff. We look forward to working with them in the future.”
Arkema has agreed to pay Klesch €100m to take on the vinyl assets which are essentially all those in France directly related the production of chlorine and vinyl derivatives as well as worldwide downstream assets, including PVC compounds, pipes and profiles.
Arkema won’t be divesting its chlor-alkali plant at Jarrie, in Isere, France which is being switched from mercury to diaphragm cell production. A PVC paste plant at Saint Auban in France will transfer with vinyls. An ethylene vinyl acetate (EVA) plant at Balan, in France, will not be part of the deal.
The move to divest vinyls is proving costly for the Paris-headquartered specialties maker, which is also expecting to take a €450m charge on the divestment in its 2011 accounts.
Losing 19% of its turnover - and a loss-making business – is seen as a positive, strategic step by financial analysts and others, however.
”This project is based on our firm belief that our specialty activities require today a differentiated strategy for each of these activities, Arkema CEO Thierry Le Henaff said on the announcement.
Financial analysts except the sharper focus on specialties to help lift the Arkema share price.
Managers in Arkema’s vinyls operations see the move to Klesch, as a subsidiary of that group with managers, assets and other personnel intact, as an opportunity.
“We used to be in a company shaped for specialties,” one said on Friday.
“In my opinion the two segments commodities and specialties are not matching together. The cohabitation together does not work especially if your core business is specialties. Commodities do not need the other end.”
Additional reporting by Abache Abreu
($1 = €0.75)
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