INSIGHT: Solvay integrates Rhodia at right time to capture value

20 February 2012 15:00  [Source: ICIS news]

By Nigel Davis

Bust of Ernest SolvayLONDON (ICIS)--Analysts believe that the Solvay/Rhodia merger can deliver both growth and cost benefits ahead of management targets. The Rhodia businesses helped ease the pain for Solvay in a fourth quarter hit by plunging demand in plastics and a more difficult operating environment for industrial chemicals. The weak spots for the new group were largely upstream and in polyvinyl chloride (PVC) and polyamide.

It remains to be seen, therefore, whether economic troubles in Europe and, to a lesser extent, lacklustre growth in the US, have a serious negative impact on the company in its new form.

Belgium-based Solvay produces and sells some very basic inorganic and organic chemicals but is driving towards greater sophistication and, indeed, sustainability. It sees potential in aligning its businesses with global megatrends and in a product portfolio that is diversified by product type and by geography.

It has six major innovation themes aligned with the megatrends and grouped around energy, chemistry, nanotechnology, eco-efficiency, organic electronics and consumer chemicals.

Solvay’s management had wanted to use the funds generated from the sale of the company’s pharmaceutical operations to diversify and reduce cyclical exposure. And the fact that the Solvay and Rhodia portfolios are complementary in these respects has been proven in the latest results.

Sales grew by 5% in the fourth quarter – Rhodia was consolidated from September – based on 3% lower volumes but 7% higher prices, and it was the Rhodia businesses that provided most of the growth.

Solvay is pushing hard on all fronts. It has raised prices significantly in rare earths, for instance, a Rhodia business, and is trying to secure supplies through a joint venture with a raw materials producer in China and through recycling. In vinyls, demand slumped in Europe in the quarter and the business slipped into loss but the focus has been on cash, and, strategically, on the costs of production.

“The first contribution by Rhodia to the Group’s quarterly results is substantial,” Solvay CEO Christian Jourquin said on Thursday 16 February.

Fourth-quarter recurring earnings before interest, tax, depreciation and amortisation (REBITDA) were down by 52% year on year in plastics and down by 15% in Solvay’s largely inorganic chemicals businesses, but were only 3% lower in Rhodia. Group REBITDA was 23% lower at €355m ($467m).

Weathering a particularly difficult quarter is one thing but the diversity brought to the group by Rhodia had clearly proved to be a positive step. Most importantly, however, the diversification and consolidation benefits will be expected to play out over a longer period.

“With 2/3 of its sales in resilient market segments and 40% in fast growing regions, Solvay is well positioned to capture growth opportunities in promising business segments responding to the industry’s undergoing megatrends,” Jourquin said. “Potential cost savings will be an additional source of value creation,” he added.

Solvay wants to be generating cost savings from the acquisition of €250m a year by 2014. In addition to an existing €120m cost control plan, total savings this year should be around €100m gross, it says.

In some analysts’ eyes, Solvay’s Rhodia was the surprise performer in the quarter in European chemicals and they are expecting the creation of greater shareholder value from the deal. Solvay’s management acknowledges poor visibility, given the troubling European financial and economic environment, but volumes are improving.

The macroeconomic and business environment is regionally diverse, with growth still strong in Asia and signs of recovery and uncertainty in Europe but “overall market conditions seem to progressively recover”, the company says.

And for Solvay, the timing of the Rhodia acquisition appears to be right in that integration savings can be used as a lever through difficult times.

The fact that 40% of the combined group’s net sales and one-third of its human resources were in Asia-Pacific and Brazil in 2011 bodes well for the medium term. Last year on a pro-forma basis 29% of its sales were made into consumer goods markets, 18% into industry, 17% into construction and 15% in automotive, with the remainder into areas such as electronics, agriculture and pulp & paper.

Solvay says it will put emphasis on operational and financial management this year as it seeks to capture greater advantage from its new-found size and market spread.

($1 = €0.76)

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By: Nigel Davis
+44 20 8652 3214



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