No Takeovers Not Playing With Chemicals

BASF and Evonik should refrain from the poker game of expensive, adventurous acquisitions pursued by state-backed Chinese and Arab chemicals firms, argues the leader of Handelsblatt’s chemicals-industry team.
BASF can also grow on its own.

 

More travel is the order of the day at Germany's leading chemicals companies.

Top managers at BASF have recently spent time in the United States examining the possibility of purchasing DuPont, America’s second-largest chemicals company. Filings at the U.S. Securities and Exchange Commission hint at these trips.

Zürich in Switzerland was also a travel destination. The heads of German giant BASF met with the management of Swiss pesticides and seeds maker Syngenta about an acquisition.

The board of Evonik, number two in Germany's chemicals industry, is focusing on other countries in Europe for a possible coup. Specialty-chemicals companies such as Clariant from Switzerland and DSM from the Netherlands were previously on the wish list of Essen-based Evonik.

It’s good thing that the German firms do not want to play this at-any-price game. Large mergers are a feat of strength in which many companies have failed before.

Nothing has come of all these potential deals. DuPont executives continue to head unswervingly toward a merger with its American colleagues at Dow Chemical. Syngenta was sold to the Chinese. Evonik hasn't abandoned its plans for a large acquisition entirely, but its enthusiasm has cooled considerably, as chief executive Klaus Engel acknowledged.

In the global chemical industry, the battle is for the top position in the sector’s equivalent of soccer’s Champions League. The Germans are participating but aren’t making an energetic push on the playing field. They are on the defensive. That is due above all to their cautious tactics. But closer scrutiny reveals: The companies are entirely correct to resist involvement in expensive and complex takeover adventures.

BASF offers the best example. A complete purchase of DuPont would be too much for the Ludwigshafen-based firm. BASF would have to pay a price that almost corresponds to its market value – more than €60 billion ($66 billion).

The integration of the diversified American chemicals company with $25 billion in revenue would be extremely difficult for BASF in particular. With its distinctive internal network, it wouldn't be easy for the company to attach a new unit at all the required points.

 

BASF and U.S.Rivals 2-01 Dow Chemical DuPont chemicals revenue profit equity

 

The integration would certainly have been easier if BASF had bought Syngenta, which concentrates on chemicals used in agriculture. But BASF was put off by the price. Chinese state-owned rival ChemChina put $43 billion in cash on the table for the Swiss company, 17 times its operating profit.

That is twice the price paid on average for chemicals companies in the past decade. Similarly high valuations led Evonik to distance itself from its previous takeover plans. Mr. Engel, just as BASF head Kurt Bock, repeatedly emphasizes an openness only to value-creating deals and an unwillingness to sit down at the industry sector’s poker game.

If German companies stick to this strategy, they won't find a way out of their defensive position anytime soon. The price for attractive chemicals companies won't be taking a plunge. This is assured by two new groups of buyers that calculate acquisitions differently than do publicly listed firms in the West.

China’s state-owned companies pay politically justified prices for foreign expansions ordered by the Chinese government. This was evident in the purchase of Syngenta by Chemchina. The Chinese consider the success of this transaction to be long-term played out over decades; Syngenta is supposed to whip the country's agricultural sector into shape.

 

018 Evonik-WTB 2015

 

In addition to the Chinese, Persian Gulf countries that have chemical-focused subsidiaries of state-controlled oil companies are also on the lookout for acquisitions. Such countries and firms are pushing their way into specialty chemicals – a European domain. And the Arab countries have cheap raw materials. The Arabs likewise look at acquisitions in terms of decades; such firms enjoy state support and tailor their offers accordingly.

It’s good thing that the German firms do not want to play this at-any-price game. Large mergers are a feat of strength in which many companies have failed before. The merger of Dow and DuPont will occur over several years, including a split into three individual companies.

During that time, the Americans will be concerned primarily with themselves. For BASF, that opens up chances in the marketplace. Because of antitrust laws, Dow and DuPont will be divesting themselves of smaller sections that BASF or Evonik could more easily digest.

Instead of allowing themselves to be maneuvered into the adventure of a large takeover, German chemical companies should trust in their own strength. That strength is to score points with innovations that no competitor from China or the Persian Gulf can imitate. That’s a trump card worth playing.

 

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