15 October 2012 12:58 [Source: ICIS news]
LONDON (ICIS)--Ciech's sale of sections of its Zachem toluene di-isocyanate (TDI) business to German chemicals giant BASF spells the end of the Polish producer's involvement in TDI, due to a non-competition obligation embedded in the deal, Ciech said on Monday.
However, Ciech said it could not comment on the conclusion of Raiffeisen Centrobank that the move would lead to hundreds of redundancies, saying that it was working on a “new formula” for lossmaking Zachem.
“As a result of the agreement, Ciech will shut down its TDI operations and dismiss the majority of Zachem’s employees – over 500 out of approximately 740 currently employed – which sooner or later had to be expected in view of the unprofitable profile of the local TDI installation, and expected capacity increases by BASF and Bayer,” wrote Dominik Niszcz, a Raiffeisen Centrobank analyst, in an equities note to clients.
“Based on the agreement, Ciech is obliged not to engage in any activity related to production, sale or distribution of TDI within three years of the transaction closure,” he added.
In a €43m ($56m) deal, Ciech agreed to sell to BASF intangibles linked to TDI production, including client lists, trade agreements and intellectual rights and know-how related to TDI technology.
BASF was paying a large amount for the deal which, according to Niszcz, “means that the German company is ready to pay generously for the withdrawal of its competitor – and at the same time does not need to worry about the potential entrance of a strategic buyer of Zachem, for example, from China.”
The Zachem TDI business – Poland's only TDI business, and Europe's fifth largest at 75,000 tonnes/year – was able to operate on a positive margin in the second quarter of this year, but it was most likely only a temporary rebound, and the risk of a prolonged subsidising of that company by Ciech was very high, Niszcz said.
“In our opinion the costs of the business closure should not exceed zlotych (Zl) 50m ($15.8m, €12.2m), with the majority of expenses being provided for the dismissed employees,” he added, noting that Ciech hopes to obtain partial financing for redundancy payments from EU funds.
Cash inflow resulting from the transaction with BASF is also important in view of a planned bond issue that Ciech plans to launch within weeks, and given that Zl300m of Ciech bonds are set to mature in December, Niszcz noted.
Analyst Piotr Drozd, at Prague-based investment bank WOOD & Company, said that the TDI unit has been a significant burden for Ciech, with a Zl60m loss reported by the unit in 2011.
“Although the company saw a minor turnaround in the segment's profitability in early 2012, the relatively small scale of production, increasing competition, soft demand [and] Zachem's aged assets and technology did not bode well for a sustained return to profitability,” he said.
TDI alone represented approximately 10% of Ciech's sales revenues in 2011, Drozd added.
The contract price obtained from BASF is a clear positive against the option of the complete closure of the Zachem subsidiary, which also makes epichlorohydrin (ECH), he concluded.
The closure of the transaction with BASF is subject to approval from the Polish treasury ministry and the regulator in Germany, the latter of which is expected by the end of February.
($1 = €0.77)
($1 = Zl3.16, €1 = Zl4.10)
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