Cytec deal is Solvay’s big entry into auto, aerospace – CEO

LONDON (ICIS)–The acquisition of US composites firm Cytec will allow Solvay to make a “big entry” into the aerospace and automobile sectors as more manufacturers seek to use lighter, more efficient materials, the CEO of the Belgium-based chemical major, Jean-Pierre Clamadieu , said on Wednesday.

Earlier, Solvay announced it will acquire 100% of Cytec for $5.5bn in cash. The two companies have entered into a definitive merger agreement, with the acquisition price set at $75.25 per Cytec share, representing a 30% premium over the share closing price of the US firm on 28 July.

Solvay intends to finance the acquisition via issuances of €1.5bn worth of shares and €1.0bn worth of hybrid instruments and senior debts.

Clamadieu said the proposed acquisition marks a major step change in Solvay’s portfolio upgrade, adding it is an opportunity to “boost its customer offerings in lightweighting with advanced materials in aerospace and automotive, as well as to strengthen its know-how with activities in mining chemicals.”

In a conference call which followed an initial press statement, Clamadieu said major plane manufacturers like Boeing are already building their jets’ primary structures with composite materials and the trend shows the secondary structures will increasingly be made of that type of material.

“Light weighting is a key driver [in this transaction]. High tech polymers and composites will allow us to become a clear leader in light products. When we look at our overall emission per tonne produced, we’ll see a significant reduction thanks to the introduction of Cytec to our portfolio,” said Clamadieu.

In regard to the automotive sector, he added that although only luxury manufacturers are currently using composites in the fabrication of vehicles, there is a growing trend to use them in more commercial vehicles.

Despite the high acquisition cost, Clamadieu said the company was targeting annual pre-tax savings of more than €100m. €75m of this would come from synergies in terms of cost during the first three years after the acquisition, together with a further €25m in the medium term in what Clamadieu defined as “top line synergies” by jointly selling products to the automotive and aerospace sectors.

“Frankly speaking, my believe is that on top of that €25m there is huge potential in some markets by bringing together the competences of both companies. This will take time, but from the technological standpoint, we should be able to develop exciting solutions for our customers,” said Solvay’s CEO.

Solvay’s share price at 11:45 CET on Wednesday fell 3.25% to €123.80 on the back of the acquisition news, but Clamadieu said the decrease was expected and shareholders and investors in time will be convinced of the transaction’s benefits.

“We are announcing an expensive transaction, and we are announcing we’ll be asking support of shareholders in the form of capital increase. The stock market reaction today is really the one we should expect,” he said.

“Now it is important for us to do some education to share with our shareholders, we have already convinced Solvac, our long-term [larger] shareholder, we have now to convince the other shareholders.”

Earlier on Wednesday, Solvac said it fully supports the proposed acquisition. It said that the mode of financing for the acquisition is “consistent with its [Solvay’s] commitment to preserving an investment grade credit rating and continuing its long-standing policy of dividend growth”. Solvac added it intends to fully exercise its rights to subscribe for new shares of Solvay to maintain its current 30.2% shareholding. 

Also during the conference call, Clamadieusaid he was pleased with the final start up of its INOVYN joint venture with INEOS for the production of polyvinyl chloride (PVC) after antitrust authorities approved the deal.

“It took us more than two years [to finalise the joint venture], after a very challenging discussion with the antitrust authorities in Europe. [It will allow us to] exit from PVC business [as Solvay will leave the JV after three years]. It is a very good opportunity to leave the business and leave our plants in the best possible [hands],” said Clamadieu.

Meanwhile, in regard to Solvay’s operations in North America, the CEO said the oil and gas sector in the region was “an area of concern” due to the “very low, depressed volumes” posted by the business.

Earlier on Wednesday, Solvay reported an adjusted net income of €143m in the second quarter, swinging from a loss of €292m in the same period of last year amid higher sales growth and an absence of one-off impairments.

Group net sales were €2.68bn, up 4.2% year on year, with the positive conversion impact of foreign exchange rate fluctuations of 9.1% more than offsetting lower volumes and prices, 3.6% and 1.3% respectively, the company added.

Solvay’s recurring earnings before interest, tax, depreciation and amortisation (REBITDA) over the same period totalled €500m, up 8.1%. The company said “conversion forex and pricing power across all operating segments, for €55m and €57m respectively, more than offset lower volumes and increased fixed cost impacts from new sites”.

In regard to the results, Clamadieu said: “The breadth of our portfolio and our excellence initiatives contributed to continued progress in operational results, despite persistent poor demand in the oil & gas and acetate tow markets.

“Many of our businesses delivered robust performance, driven by innovation, particularly at Advanced Materials, as well as pricing power across the board. We continued to benefit from favourable foreign exchange rates. We pressed ahead with our portfolio upgrade to increase our growth, returns and resilience, having sold our refrigerant business and created the INOVYN joint venture,” he added.

By division, REBITDA at Solvay’s Advanced Formulations unit was €100m, down 12% year on year, “as the persistent and substantial decline of demand in the oil & gas industry impacted Novecare, and was only partly compensated by higher sales volumes at Aroma Performance,” the company said.

Within Advanced Materials, REBITDA rose 18% to €214m, helped by volume growth throughout the segment, and particularly at Specialty Polymers;

The Performance Chemicals business unit reported REBITDA of €185m, a 9% increase, “with strong net pricing benefits at Soda Ash and Peroxides” offsetting sustained destocking in subsidiary Acetow’s market, while Functional Polymers REBITDA rose 23% to €45m.

For the first six months of this year, Solvay posted an adjusted net income of €265m versus a loss of €225m in the corresponding period of last year. Sales rose by 5.3% year on year to €5.32bn in January-June 2015, while REBITDA were up by 10% at €1bn.

Looking ahead the company said it “remains confident it will generate solid REBITDA growth in 2015, despite the expectation of continued uncertainties in various markets”.

Additional information by Franco Capaldo, Pearl Bantillo and Nurluqman Suratman