Interview story by Joseph Chang
NEW YORK CITY (ICIS)--Germany-based BASF is aiming to constantly transform its portfolio in a pragmatic fashion to position itself for sustainable long-term growth, its CEO said.
“Pruning your portfolio is a constant task. … When you look over a longer timeframe, BASF has been extremely active, especially exiting businesses. We have been actively restructuring and have also made a couple of acquisitions,” said BASF CEO Kurt Bock in an interview with ICIS this week at the ICIS Kavaler Award event in New York.
Through the years, BASF has exited the polyolefins, fertilizers, styrenics and gas trading businesses, he noted.
On the mergers and acquisitions (M&A) front, the company has been disciplined and selective.
In September, BASF announced the acquisition of Solvay’s polyamide (nylon) 6,6 business for €1.6bn, in a deal expected to close in Q3 2018. The transaction multiple is a very reasonable 7 times last 12 months earnings before interest, tax, depreciation and amortisation (EBITDA).
“Sometimes it feels like with today’s standards, everything is small unless you spend double-digit billions of dollars, but it’s really about the competitiveness of the individual businesses,” Bock said.
“The Solvay deal is a good example - we are strong in [polyamide 6] and Solvay in PA6,6 and also backward integrated. So for us it’s a very nice combination, essentially providing a fuller product portfolio for our customer industries, especially automotive. … Selling these products today is all about applications know-how and technology, and in that respect, it makes our business even better,” he added.
And on valuations, just because a business fetches a high double-digit EBITDA multiple, it does not automatically make its growth profile more attractive, and vice versa for lower multiple transactions, he noted.
BASF’s last major acquisition – that of metal surface treatments company Chemetall for $3.2bn from Albemarle in December 2016 – was highly complementary to its coatings business, he pointed out.
In the end, the cumulative impact from a number of these types of acquisitions and divestitures can be significant.
“Sometimes it feels like not much is happening. But over time, this is a gradual improvement of your business, and you may find your portfolio is quite different than when you started,” Bock said.
“We want to drive the company in a direction where we create a competitive advantage, so we are not victim to price volatility or emerging competitors who may have a feedstock cost advantage. We want to drive our competitiveness based on innovation … and closeness with our customers,” he added.
Over the past decade, BASF has exited certain businesses that have been good cash generators, but that had relatively lower growth profiles and little specific advantages, he noted.
The world’s largest chemical company prior to the creation of DowDuPont when that merger closed on 31 August, BASF is agnostic about overall size for the sake of it.
“We are not driven by a sales number. … If we were concerned about [total] size, we would not have divested our gas trading business, which had a high sales number but relatively low profit. … But size does matter. We believe we can create additional value by having different but related businesses under one roof,” Bock said.
For example, with a number of businesses – from coatings to plastics and polyurethanes to metal treatments – BASF is by far the largest automotive supplier in the chemical industry with more than €10bn in annual sales, he said.
“This makes us a very attractive partner for the automotive industry when they talk about new trends and developments. They want to sit down with BASF because we have the breadth and the depth and the knowledge and willingness to invest for the long term for these relationships,” Bock said.
As a large diversified chemical company, BASF constantly has to prove that integration pays, and make sure it never cross-subsidises underperforming businesses.
“In that respect, we are pretty ruthless when it comes to underperformance, and one consequence could be divestiture. There is constant pruning,” Bock said.
On 2 October, BASF closed the sale of its leather chemicals business to the Netherlands-based Stahl, while taking a 16% stake in the company.
With the deal, Stahl will have a total combined sales between €870-890m and EBITDA between €200-210m on an estimated pro forma 2017 basis.
“This also shows our flexibility. We are completely unemotional about these things. If we see we can create something bigger [and more valuable], even by combining it with someone larger than us, so be it,” Bock said.
EXPECT THE UNEXPECTED
In the US, BASF had considered a worldscale methane-to-methanol-to-propylene (MMTP) project, but put it on hold in February 2017 on economic considerations.
“Ultimately, the economics depend on the price differential between oil, which sets the marginal production cost, and methane. The project was far more attractive at $100/bbl oil than $50/bbl,” Bock said.
“Interestingly, with the oil price collapse, all of a sudden the European naphtha-based companies became more competitive. That was not supposed to happen because the common wisdom then was that with shale gas, the world had changed forever and the US was more competitive,” he added.
US CAPITAL COSTS HURDLE
One major consideration for investment in the US is the high capital cost, he noted.
“You have seen skyrocketing investment costs in North America. Many companies have experienced this, including BASF. The United States today is the most expensive region in the world to build new chemical plants, by far,” said Bock.
“This [offsets] to a very large extent the advantages of having relatively cheap feedstock based on shale gas and oil,” he added.
There is also a “complete mismatch between labour costs and productivity compared to other regions”, said Bock.
BASF will from time to time evaluate the underlying assumptions of the project, he said.
The company’s has largely increased total capital expenditures (CAPEX) since 2012, but then reduced CAPEX in 2016 and will take it down slightly in 2017.
“The big investment surge we had is behind us for the time being. But we will constantly revisit what we are doing. … You have to take everything into consideration including investment costs, and supply/demand,” Bock said.
“Quite a bit of the investment surge in North America was driven by simply the abundance of cheap raw materials. And then people started thinking about who’s going to buy that material later on – and just pelletising it and shipping it to Asia is not exactly our business model,” he added.
The CEO has a positive view on the global macroeconomic outlook. He cited an upswing in activity in Europe, including solid recoveries in Spain and France. And despite some analyst concerns about a slowdown in China’s economy, Bock is optimistic.
“It doesn’t feel like China is slowing down, at least for BASF. Our business is developing very nicely there,” said Bock.
However, there are question marks on Brexit, the future of global trade, and standards and regulations. Companies should be prepared for major shake-ups, he noted.
“We have to be ready to see more surprises to come. … If we believe we know what is going to happen, we will be proven wrong,” Bock said.