Sun Chemical is hoping that its planned takeover of Coates will go ahead without any major hitches.
Edward Barr, chairman of Sun Chemical Group, said after the announcement of the proposed acquisition in July that he was looking forward to a “smooth combination” of the two businesses.
In Europe, however, the view among executives in competing companies and customer sectors, as well as analysts, seems generally to be that Sun may run into some anti-trust concerns from the European Commission, the European Union executive which acts as the EU competition authority.
Sun, which is part of Japan’s Dainippon Ink & Chemicals, has merely signed a letter of intent with TotalFina, Coates’ owner, to acquire its ink division for an undisclosed sum.
The provisional agreement gives Sun around four to five months to negotiate with the authorities and to ascertain whether it can find buyers for possible divestments.
“It is going to be very hard for Sun to get this deal approved by the regulatory bodies because it already has such a dominant position in the ink industry, especially in Europe,” said Jamie Talmage, a market analyst at Market Tracking International (MTI), London, which has just published a report on the world ink market in 1999-2003.
Dainippon, whose ink business mainly comprises Sun Chemical, is currently the clear global leader with annual ink sales of around $4 billion, while Coates is the sixth largest worldwide, with sales of approximately $850 million, according to MTI.
Dainippon has approximately 30 percent of the total world ink sales of $12 billion. With the Coates acquisition, this will rise to approximately 36 percent.
The worldwide operations will be divided between Dainippon and its subsidiary. The Tokyo-based parent will assume control of Coates’ activities in the Pacific, southeast Asia, China and India, while the remainder will be incorporated into Sun’s activities.
Coates’ main market is in Europe, where it is No. 2 behind Sun. The combined group will have around half the European market, but in some sectors like heatset inks, its share will be higher than that. In the U.K., MTI estimates that the Sun/Coates share of heatset inks could be as high as 70 to 80 percent.
With some recent acquisitions, the European Commission has decided that a company has an unacceptable dominant position with a market share of over a third. Hence there is the strong belief in the EU ink industry that Sun will have to make substantial divestments, and that Sun has already been looking for possible buyers of parts of the Coates’ operations in Europe or even for some of its own activities.
“It must have taken all this into consideration before it reached a deal with TotalFina,” said a senior executive of one EU ink company. “It would not be surprising if it already had potential buyers lined up for some of the Coates operations before signing the letter of intent.”
Companies possibly interested in snapping up divestments imposed by the Commission could include BASF, Akzo Nobel and Japanese ink companies like Toyo Ink and Sakata, which want a broader presence in Europe. Another candidate is Flint Ink, which has made it clear that it wants to to expand further in Europe following its acquisition of Manders Premier of the U.K. at the beginning of 1998.
Coates is thought to have been effectively put up for sale for a year or even more by Total, which completed its merger with PetroFina at the end of June.
However it had trouble finding potential purchasers willing to take over the whole business, rather than only parts of it, according to industry sources.
The French oil and chemicals company has been embroiled in a merger battle with its French counterpart Elf Aquitaine. TotalFina made a EUR 42 billion ($44 billion) bid for Elf in early July, to which Elf responded soon afterwards with a EUR 50 billion counter-bid for TotalFina.
“TotalFina will have to wait until the end of the year before it can be certain that the deal will go through, but nonetheless, the way this deal had been reached shows it must be desperate for cash at the moment,” said Mr. Talmage.
After disclosing the provisional agreement with Sun, TotalFina seems to have few worries about possible difficulties with the European Commission over anti-trust matters. “Our policy is not to announce deals like this if we think we cannot go through with them,” said a company spokesman.
The ink business had been falling short of its targets, particularly in the highly competitive European market where margins have been gradually eroded in recent years.
The operation had set a target in 1995 of a 50 percent increase in sales in five years, which would have brought its turnover close to FFr 7 billion by 2000. But by 1998 it was already well behind schedule, with sales of FFr 5 billion. It has also thought to be struggling to achieve the average profit margins of 8 to 10 percent set by the Total board.
With the merger of Total and PetroFina, Coates could have become part of a broadly based coatings and adhesives activity, which would be vertically integrated with Total’s Cray Valley resins business.
TotalFina decided, however, that there were no important synergies to be gained from the inks operation in the enlarged group.
“The transaction (with Sun) is in line with TotalFina’s clearly announced strategy of refocusing and developing its chemicals business in its most promising segments,” the company said.
The Coates division of TotalFina stemmed from the formation of an alliance in 1988 between Coates Brothers of the U.K. and Lorilleux of France. While Coates had been founded in 1877, Lorilleux was the world’s first specialist ink production company when it was set up in 1818.
Coates had established plants and sales outlets throughout the British colonies, in particular in Australasia, Asia, Africa and the Caribbean. In addition to being dominant in France, Lorilleux had strong positions in several European markets, as well as North Africa and areas of Latin America, like Argentina.
The Coates Lorilleux partnership was well placed to become a truly global inks operation. But it continued to be weak in the key markets of the U.S. and Germany. “Despite its quality assets, the (inks division) did not have strong enough positions in the two leading western markets of North America and Germany,” says TotalFina.
Nonetheless the broad international spread of the Coates business, particularly in the Asia Pacific, is a big attraction to Sun and its parent Dainippon.
It has a joint venture in China with Taiyuan Printing Inks, one of the country’s largest ink producers. Coates of India has been a leader in the country’s inks market.
In addition, Sun is interested in Coates’ business in screenprinting inks, which it wants to expand.
Coates has also been one of the first major inks producers to move into digital printing. It now has a leading position in Europe in digital inks for the large format market for advertising and exhibition posters.
Sun’s objective in Europe is to be the leading supplier of bulk products in the main ink sectors through its system of mother plants and its vertical integration into supplies of raw materials through its parent Dainippon.
It now has around eight European mother plants making heatset products and inks for sectors like publication gravure, coldset, sheetfed litho and flexo.
These have been designed to service a system which enables large customers to be supplied direct with one-ton lots delivered by road tanker. Increasingly, these customers’ storage tanks are linked on-line to Sun’s plants for automatic refilling.The vital issue for Sun is whether the European Commission will share its vision of an inks market in Europe based on high volume production and delivery systems.