It’s a textbook example of a successful spin-off. On Monday, plastics maker Covestro, which was only formed in 2015 when chemicals giant Bayer hived off its materials division, will join the DAX index of Germany’s top 30 listed companies. The promotion reflects the fact that Covestro's share price has more than tripled since its IPO, bringing its current stock market value to €17 billion ($20.9 billion).
That’s not bad for a company that makes the plastics used in such mundane items as car seats, sports equipment and furniture. And with several companies undertaking their own spin-offs, including Siemens’ healthcare unit Healthineers, Deutsche Bank’s asset management division DWS and Volkswagen’s truck subsidiary, many executives are keen to find the secret to Covestro’s success.
Companies are responding to increasing pressure from investors, who want them to focus on certain areas of business and are demanding more growth in value. They hope that their subsidiaries will benefit from their new-found freedom, as was the case with Covestro. That said, perceived wisdom suggests spin-offs have built in advantages. These lie in their access to capital, the establishment of an independent corporate culture and faster decision-making.
Covestro's operating profit has quadrupled to €2.8 billion since 2015.
"I thought of us as being like a horse in its stall that is ready to run off at last," said Markus Steilemann, who has been appointed Covestro's new chief executive, a role he’s likely to take up in spring. "Admission to the index was never our actual goal, and we didn't prepare for it, we just worked hard and with a focus," said the 47-year-old, who is currently Covestro’s sales and marketing chief. "It's another milestone and a duty to create further value."
Bayer still holds a 14 percent share in its baby and it’s easy to see why. Covestro's operating profit has quadrupled to €2.8 billion since 2015 under current chief Patrick Thomas, while net profit has increased six-fold to €2 billion and sales have risen 17 percent to €14.1 billion.
But the company's success is not just down to added flexibility. It is benefiting from a strong economy, extremely favorable market conditions and a focus on two product segments: polycarbonate and polyurethane. It is the global market leader in both areas.
In particular, the polyurethane business is thriving like never before, with the most recent figures showing an EBITDA margin of 29 percent on the material, which is used in everything from sponges to Spandex and condoms. This is due to unexpectedly strong growth in demand coupled with a shortage of supply, with rivals such as BASF, Sabic and China's Wanhua all experiencing production problems.
Most experts and industry insiders agree that margins will return to normal sooner or later, though there is still some debate on the speed and pace of that drop. While experts at UBS expect Covestro's margins to remain positive overall, analysts at Citigroup are warning of a fresh spate of investment in the sector, even if Covestro itself is exercising discipline. "The industry as a whole is creating so much new capacity that utilization of facilities will fall, and with it the high margins," one study said.
But Mr. Steilemann is confident that the company's core portfolio offers sufficient potential for long-term growth. "We expect growth to be above that in the global economy in all three business areas [Europe, North America and Asia], including in the years after 2018," he said. He expects this to be further boosted by innovations, for example in niche markets that are growing rapidly, such as optics and medical technology. In other words, expect Covestro to make a solid new member of Germany's blue-chip DAX index.
Bert-Friedrich Fröndhoff leads a team of reporters which covers the chemicals, health care and services industries at Handelsblatt. Siegfried Hofmann is Handelsblatt's chemical and pharmaceutical industries correspondent. To contact the authors: [email protected], [email protected]