LANXESS’ ARLANXEO stake sale prompted by Aramco buy-out offer – CEO

LONDON (ICIS)–The sale of LANXESS’ remaining 50% stake ahead of market expectations was prompted by a buy-out offer by joint venture partner Saudi Aramco based on the growth plans of the oil and gas giant for the business , according to CEO Matthias Zachert.

The Germany-based chemicals producer rolled its synthetic rubber assets into a joint venture with Aramco in 2016, giving the Saudi oil and gas giant the opportunity to diversify downstream, reducing LANXESS’ exposure to the automotive sector, and providing cash to diversify its portfolio.

Since then, the company has aggressively shifted its focus towards specialty chemicals, with a target of taking up leading positions in niche mid-sized sectors.

Over the last three years it has brought flame retardants and lubricants specialist Chemtura, the phosphor assets owned by Solvay, and the cleaning and disinfectants arm of Chemours.

The 50/50 ownership structure had been expected by analysts to last until 2020, particularly as an arrangement for cheap feedstocks for ARLANXEO from Aramco had been expected to kick in this year. Diverging growth plans for the two companies prompted the move for ARLANXEO to sell out in 2018

Saudi Aramco, which has pursued diversification strategies of its own with a heightened focus on the petrochemicals sector and the mooted purchase of producer SABIC, has ambitious growth plans for ARLANXEO, requiring additional investment from LANXESS in a different direction from its current strategy.

“Nearly three years down the road [from the formation of the JV], this strategic direction [on specialties] didn’t change, and Aramco wanted to build further world-scale rubber capacities in Saudi Arabia,” Zachert said.

“As these sites would only have come on the market after 2021, we saw no upside for us, and no reason to participate in this. Based on this feedback, Saudi Aramco then proposed to buy us out.”

The €1.4bn deal was completed in late December, and LANXESS has so far allocated €200m for pension commitments and €200m for a share buy-back, leaving €1bn in funds for growth investments.

Zachert described the deal as well-timed, particularly in light of a bearish market for the automotive sector expected this year. Aramco, with huge cash reserves and no requirement to disclose the performance of its assets every quarter, is less exposed to the fortunes of one specific industry.

Aside from reducing LANXESS’ exposure to the automotive and tyre markets to 20% from nearly half in 2014, the divestment also reduces its dependence on a favourable oil price by diversifying its feedstock slate.

The company’s key feedstocks now include ammonia, benzene, cyclohexane, chlorine, caustic soda and toluene, but nothing dominates to the extent that crude did when half the company was rubber.

“If you look into the portfolio in the past, rubber was dominating procurement and we were basically on C2, C3, C4 oil and gas derivatives, everything else was almost meaningless compared to these three raw materials,” he said.

“Now we have a mixed basket of raw materials but there is not one raw material that stands out comparably to C2/C3/C4,” he added.

Zachert expects to put the bulk of the ARLANXEO funding towards growing its operations and mergers and acquisitions, depending on the opportunities that are out there.

Chemicals company valuation multiples have come down as the economy has cooled, although lack of organic growth can intensify interest in buy-outs, and debt finance remains cheap.

LANXESS is open to bolt-ons, but is also open to a larger growth play to grow its specialties footprint, according to Zachert.

“We like bolt-ons but we are also prepared to do bigger-size transactions,” he said.

The company may be looking for assets further afield, following its intensified North American focus with the Chemtura and Chemours deals.

“We are striving for regional diversification. Today our turnover is by and large 50% in European markets,” he said. “In an ideal world, we want to go toward one third in the Americas, one third in Asia, one third Europe.”

With the US-China trade war ongoing, relations between the EU and the North American superpower becoming increasingly frosty, and uncertainty continuing to reign over the UK’s post-divorce relationship with the EU, the shift from globalisation to regionalism looks set to continue.

“Our assumption is that protectionism is going to increase, and if this is the case you should be regionally diversified,” Zachert added.

While LANXESS’ exposure to the UK is relatively modest, around €100m of annual revenues, the company has been taking steps to mitigate the impact of even a hard Brexit, where the UK left the EU with no deal and reverted potentially to World Trade Organisation rules.

Stockpiling has been rampant in the run-up to the projected 29 March departure and, while that date is looking less likely to be the day the UK quits the bloc, the company has been attempting to minimise disruption even in the event of no deal or transition period.

“We have already taken immediate steps to stock up in the UK inventories, the same has happened around Europe, and we are making sure that products that were shipped in the past from Europe to UK are produced now and shipped to UK in advance and vice-versa,” he said.

The company is also registering products that were previously only licensed in the UK in other territories, and evaluating its portfolio in light of potential new UK Reach registration requirements.

“If a hard Brexit happens, there could be chaos at the customs clearance for potentially some months, which could lead to major disruptions in the production value chain, particularly in the UK. We want to be prepared for this,” he said.

“Some products which are very small [volume] for us, if the re-registration efforts are economically not reasonable, we would just stop selling them,” he added.

Picture source: LANXESS

Interview article by Tom Brown