ARLANXEO divestment good for LANXESS but proceeds lower than expected - analysts

Author: Niall Swan


LONDON (ICIS)--LANXESS' shares jumped 5% on Wednesday after the German chemical producer announced it is to sell its remaining 50% stake in ARLANXEO to Saudi Aramco for an expected €1.4bn.

- Synthetic rubber joint venture partners speed up timings 

- Some analysts expected a price tag of up to €1.8bn

- Potential downturn in automobile may have prompted the move

The synthetic rubber joint venture, formed in 2016, is valued at €3.0bn. LANXESS will receive approximately €1.4bn for its 50% stake after deducting debt and other financial liabilities.

The company said it plans to use the proceeds to strengthen its financial basis and reduce net financial debt.

“With the envisaged transaction we would complete another important milestone of our strategic transformation earlier than originally planned. This should allow us to even better focus on our position as a leading player in mid-sized specialty chemicals markets,” said Matthias Zachert, LANXESS CEO.

“At the same time, we increase the resilience of our business, strengthen our financial basis and gain additional strategic flexibility for further growth.”

The announcement did not come as a surprise to some analysts, although the transaction's timing did.

Both joint venture partners had agreed that there would be no change in ownership before 2020, equity chemical analyst Oliver Schwarz at Germany's Warburg Research said to ICIS on Wednesday, citing several reasons as to why that agreement was not upheld.

He referred to LANXESS' decision to report ARLANXEO as discontinued business in its financial reporting from the second quarter of 2018 onwards.

“Only the net result attributable to LANXESS is shown in the profit and loss statement as a separate line affecting the net income. So it was already well known that LANXESS and ARLANXEO would go different ways sooner or later," he said.

Schwarz also pointed to the fact that LANXESS decided against waiting for the implementation of an agreement between the partners that Saudi Aramco would provide delivery of raw materials at very competitive price points from 2019 onwards.

“The partners didn’t wait for that, either because LANXESS has another acquisition target on its mind and simply needed the cash to finance that, or because it wanted to become more visible as a pure-play specialty chemicals player," said the analyst.

“Lastly, it could have been that LANXESS was anticipating a downturn in the automotive industry, which would have weighed on profitability and may or may not have resulted in the same – or even a lower – selling price come 2020.”

The current trade war between China and the US may have also prompted LANXESS to speed up the sale of its stake at ARLANXEO, he added, considering global political and economical uncertainty.

While the automobile industry is still performing well, Schwarz said that could change in the next six to 12 months on the back of trade woes.

Schwarz added that the €1.4bn price tag for the 50% stake was fair but had fallen short of most analysts' estimates.

“If you had asked me this morning what the selling price would be, I would have said €1.5bn-1.75bn, maybe €1.8bn. That said, the €1.4bn figure compares favourably to the €1.2bn LANXESS originally got for the sale of the first 50% in 2015.”

Chemical analysts at German investment bank Baader Bank agreed that the price to be paid by Saudi Aramco was not as much as expected considering a valuation of the joint venture at €3.5bn.

The €1.4bn figure did not differ much from the 2015 price tag paid by the Saudi major in 2015, despite a notable recovery of tyre volumes reflected in higher EBITDA margin.

“Despite its still-commoditised specialty chemical portfolio, LANXESS trades at a premier compared to close EU peers and consequently is not an attractive investment despite the ARLANXEO divestment," said the bank.

Baader Bank said that it is maintaining its rating of LANXESS as sell, with a 12-month share price target forecast of €65.00.

LANXESS' shares were trading by midday London time at €70.54, up 5% from Tuesday's close.

(Update: Re-casts headline, introduction, adds analysts commentary from paragraph 7)

Focus article by Niall Swan

Pictured: An ARLANXEO facility in Dormagen, Germany
Picture Source: LANXESS


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