Sean Milmo, Ink World European Editor10.02.08
The $3.4 billion proposed takeover of Ciba Specialty Chemicals by the German-based chemicals giant
BASF announced in mid-September is likely to be followed by similar merger deals covering the supply chain of inks and other graphics materials.
The acquisition is seen as a sign of intense financial pressures on suppliers of raw materials and intermediates from soaring raw material costs, triggered by increases in the prices for crude oil and other basic commodities.
Producers of key intermediates such as pigments, additives and resins have had difficulties withstanding the sharp fluctuations in their raw material prices.
Even leading players like Ciba, a major producer of pigments and additives which last year had sales of SFr 6.5 billion ($5.8 billion) have found that they are not big enough to resist the price increases of their suppliers. At the same time, they do not have enough clout within their own markets to pass on the full impact of increases in raw materials costs to their own customers.
In the first of this year, Ciba incurred a SFr 569 million loss ($508 million) after an impairment cost for its water and paper treatment division. Group sales fell by 7 percent and operating income by 41 percent as it struggled to cope with squeezed margins resulting from higher raw material costs. During the second quarter, raw material and energy costs jumped an estimated 10 percent.
The company’s share price decreased by 15 percent to accelerate its downward trend over recent years.
Ciba, based in Basel, Switzerland, has conceded that lack of critical mass, even for a company of its size, had been a crucial factor behind its decision to abandon its independence.
Armin Meyer, the company’s chairman, referred to it as being in a “sandwich position” between suppliers and customers, which aggravated the problem of dealing with higher costs and exchange rate volatilities. It is a dilemma currently confronting other suppliers of specialty chemicals.
“Over the past few years, the chemicals industry faced several challenges,” he told a press conference in Zurich after the announcement of BASF’s takeover offer. “Besides the consolidation of customers and suppliers, important cost items like raw material and energy have increased substantially. Additionally, the turbulences on the financial markets over about a year are impacting our business too.
“The business model of specialty chemicals players faces structural risks, which have been addressed differently by various companies in the industry,” he added.
Ciba has chosen to become backward integrated into a company – the largest in the global chemical industry – which is a major producer of raw materials while also being a supplier to Ciba.
BASF is also a Ciba customer. Although it has a large proportion of commodity chemicals in its portfolio, it is also a specialty chemicals producer which is active in the packaging and coatings and inks sectors.
“We are highly convinced about the strategic and industrial logic of this combination,” said Mr. Meyer, whose board is recommending that shareholders accept BASF’s offer. BASF’s offer is also subject to an acceptance rate of at least 66.6 percent of the voting rights.
Effectively Ciba has opted for structural integration. It is a pathway which is likely to be followed by other raw material and intermediate producers, resulting in greater concentration along the supply chain for printing inks and related sectors.
Juergen Hambrecht, BASF’s chairman, predicted that there would be more consolidation.
“For some years, atomization was the message, with pure play companies in vogue,” Mr. Hambrecht said in an interview with The Financial Times. “But now we are in a new phase, in which it is really hard for specialty chemicals groups to stand on just one leg.”
Ciba, which has been considering merging with another player for a few months, was rumored to be planning to link up with Clariant, another major producer of pigments.
Another option which had already been followed by Ciba has been a greater focus on its higher margin and high growth operations, with activities with poor profitability being divested.
A few days after the news of BASF’s offer, Ciba announced it is taking over the photoinitiator business of Lamberti Group of Italy, which has been developing new UV curing technologies for food packaging. The acquisition was an opportunity for growth “in one of the most important areas of our business,” said Thomas Engelhardt, global head of Ciba’s coating effects segments.
At the same time, however, Ciba had already made moves to offload its classical pigments operation, which has a production plant at Paisley, Scotland as well as capacity in China. After revealing the company’s first half profit loss in mid-August, Brendan Cummins, Ciba’s chief executive, said the company was evaluating a “number of options” for its publication ink business, comprising mainly standard pigments.
It seems possible that after Ciba’s merger with BASF is completed the commodity pigments activity will still be sold.
Greater consolidation among suppliers of ink raw materials is likely to include divestments of business which are considered to be non-core to the new combined operations.
BASF is thought to have been watching Ciba for some time as part of its strategy of becoming less dependent on cyclical, commodity chemicals by gaining a stronger presence in high margin, resilient segments like packaging and coatings. It first made a formal approach to Ciba’s board on August 7, several days before the Swiss company announced its poor interim results.
The offer of SFr 50 per share is a 32 percent premium on the earlier closing share price and 60 percent higher than the average level of the previous 30 days. It represents a multiple of almost nine on Ciba’s forecast earnings before interest, tax, depreciation and amortization (EBITDA) in 2008.
The offer first had to be approved by the Ciba board because Swiss law bans hostile takeovers. It also includes a commitment by BASF to maintain a research and development center in Basel and to establish the global headquarters of a company division in the city.
The deal will be considered by an emergency meeting of Ciba shareholders in November with the objective of completing the deal in the first quarter of next year.
The addition of Ciba to the BASF group will add only 7 percent to the German company’s sales. But within the global sectors for product categories like packaging and coatings effects, the gap between the two is much closer.
BASF has admitted there may have to be some restructuring of Ciba’s product range in order to achieve the full potential of its added value. This is especially the case in areas where Ciba has considerable expertise and above all closeness to the customer.
“We strongly believe in the high quality of the majority of Ciba’s portfolio,” said Mr. Hambrecht. “There is no doubt that Ciba’s technological know-how, experience and customer intimacy form a sound basis for long-term profitable growth.”
The acquisition will elevate the combined operation to the largest global supplier in plastic additives and second-largest in coating effect materials.
In plastic additives, which include pigments and additives for printing on plastic substrates, the merger activities of the two companies will be more than four times larger in terms of sales than the nearest competitor. The pigments part of the plastics additives operation will have sales of around €400 million ($570 million) a year, or approximately 25 percent of the total.
In coating effects, which includes pigments for both paints and inks, pigments will amount to approximately €1.75 billion.
For BASF, a major attraction of Ciba is its strength in packaging where a large proportion of BASF’s €2 billion annual sales is in the production of flexible and rigid plastic substrates as well as adhesive raw materials.
Ciba’s €700 million sales in packaging is predominantly in pigments, light and process stabilizers and UV absorbers, including photoinitiators.
Through the branding of its Xymara pigment range, Ciba has been establishing a powerful position in effect pigments, especially in the packaging sector. In addition it has a range of high performance organic pigments which have been making inroads into the segment.
At last month’s 100% Design exhibition in London, the company showcased a new array of Xymara pigments, including ones with color-travel effects in which the color shade varies as the viewing angle changes. The pigments comprise transparent coatings with metal and pearlescent effects on a base coat of high performance organic pigment. The company has also developed hybrid pigments consisting of combinations of effect and organic pigments.
BASF is also hoping to utilize Ciba’s R&D and product development in electronics, particularly printed electronics. BASF has pinpointed electronics as one of its priority growth sectors.
Over the last few years, Ciba has established partnerships and collaborations in printed electronics with universities, research institutes, technology development companies and startups.
Among its research alliances is one with VTT Technical Research Centre of Finland, which is concentrating on novel materials and processes for printing organic electronics. In June the partnership was expanded to cover new printing systems for high-volume packaging and diagnostics. VTT will carry out trials on roll-to-roll equipment so that processes and materials can be developed in parallel.
At its main site at Ludwigshafen, Germany, BASF has set up a Joint Innovation Lab (JIL) in organic electronics to conduct research with industrial companies, universities and research institutes both in and outside Germany.
The acquisition is seen as a sign of intense financial pressures on suppliers of raw materials and intermediates from soaring raw material costs, triggered by increases in the prices for crude oil and other basic commodities.
Producers of key intermediates such as pigments, additives and resins have had difficulties withstanding the sharp fluctuations in their raw material prices.
Even leading players like Ciba, a major producer of pigments and additives which last year had sales of SFr 6.5 billion ($5.8 billion) have found that they are not big enough to resist the price increases of their suppliers. At the same time, they do not have enough clout within their own markets to pass on the full impact of increases in raw materials costs to their own customers.
In the first of this year, Ciba incurred a SFr 569 million loss ($508 million) after an impairment cost for its water and paper treatment division. Group sales fell by 7 percent and operating income by 41 percent as it struggled to cope with squeezed margins resulting from higher raw material costs. During the second quarter, raw material and energy costs jumped an estimated 10 percent.
The company’s share price decreased by 15 percent to accelerate its downward trend over recent years.
Ciba, based in Basel, Switzerland, has conceded that lack of critical mass, even for a company of its size, had been a crucial factor behind its decision to abandon its independence.
Armin Meyer, the company’s chairman, referred to it as being in a “sandwich position” between suppliers and customers, which aggravated the problem of dealing with higher costs and exchange rate volatilities. It is a dilemma currently confronting other suppliers of specialty chemicals.
“Over the past few years, the chemicals industry faced several challenges,” he told a press conference in Zurich after the announcement of BASF’s takeover offer. “Besides the consolidation of customers and suppliers, important cost items like raw material and energy have increased substantially. Additionally, the turbulences on the financial markets over about a year are impacting our business too.
“The business model of specialty chemicals players faces structural risks, which have been addressed differently by various companies in the industry,” he added.
Ciba has chosen to become backward integrated into a company – the largest in the global chemical industry – which is a major producer of raw materials while also being a supplier to Ciba.
BASF is also a Ciba customer. Although it has a large proportion of commodity chemicals in its portfolio, it is also a specialty chemicals producer which is active in the packaging and coatings and inks sectors.
“We are highly convinced about the strategic and industrial logic of this combination,” said Mr. Meyer, whose board is recommending that shareholders accept BASF’s offer. BASF’s offer is also subject to an acceptance rate of at least 66.6 percent of the voting rights.
Effectively Ciba has opted for structural integration. It is a pathway which is likely to be followed by other raw material and intermediate producers, resulting in greater concentration along the supply chain for printing inks and related sectors.
Juergen Hambrecht, BASF’s chairman, predicted that there would be more consolidation.
“For some years, atomization was the message, with pure play companies in vogue,” Mr. Hambrecht said in an interview with The Financial Times. “But now we are in a new phase, in which it is really hard for specialty chemicals groups to stand on just one leg.”
Ciba, which has been considering merging with another player for a few months, was rumored to be planning to link up with Clariant, another major producer of pigments.
Another option which had already been followed by Ciba has been a greater focus on its higher margin and high growth operations, with activities with poor profitability being divested.
A few days after the news of BASF’s offer, Ciba announced it is taking over the photoinitiator business of Lamberti Group of Italy, which has been developing new UV curing technologies for food packaging. The acquisition was an opportunity for growth “in one of the most important areas of our business,” said Thomas Engelhardt, global head of Ciba’s coating effects segments.
At the same time, however, Ciba had already made moves to offload its classical pigments operation, which has a production plant at Paisley, Scotland as well as capacity in China. After revealing the company’s first half profit loss in mid-August, Brendan Cummins, Ciba’s chief executive, said the company was evaluating a “number of options” for its publication ink business, comprising mainly standard pigments.
It seems possible that after Ciba’s merger with BASF is completed the commodity pigments activity will still be sold.
Greater consolidation among suppliers of ink raw materials is likely to include divestments of business which are considered to be non-core to the new combined operations.
BASF is thought to have been watching Ciba for some time as part of its strategy of becoming less dependent on cyclical, commodity chemicals by gaining a stronger presence in high margin, resilient segments like packaging and coatings. It first made a formal approach to Ciba’s board on August 7, several days before the Swiss company announced its poor interim results.
The offer of SFr 50 per share is a 32 percent premium on the earlier closing share price and 60 percent higher than the average level of the previous 30 days. It represents a multiple of almost nine on Ciba’s forecast earnings before interest, tax, depreciation and amortization (EBITDA) in 2008.
The offer first had to be approved by the Ciba board because Swiss law bans hostile takeovers. It also includes a commitment by BASF to maintain a research and development center in Basel and to establish the global headquarters of a company division in the city.
The deal will be considered by an emergency meeting of Ciba shareholders in November with the objective of completing the deal in the first quarter of next year.
The addition of Ciba to the BASF group will add only 7 percent to the German company’s sales. But within the global sectors for product categories like packaging and coatings effects, the gap between the two is much closer.
BASF has admitted there may have to be some restructuring of Ciba’s product range in order to achieve the full potential of its added value. This is especially the case in areas where Ciba has considerable expertise and above all closeness to the customer.
“We strongly believe in the high quality of the majority of Ciba’s portfolio,” said Mr. Hambrecht. “There is no doubt that Ciba’s technological know-how, experience and customer intimacy form a sound basis for long-term profitable growth.”
The acquisition will elevate the combined operation to the largest global supplier in plastic additives and second-largest in coating effect materials.
In plastic additives, which include pigments and additives for printing on plastic substrates, the merger activities of the two companies will be more than four times larger in terms of sales than the nearest competitor. The pigments part of the plastics additives operation will have sales of around €400 million ($570 million) a year, or approximately 25 percent of the total.
In coating effects, which includes pigments for both paints and inks, pigments will amount to approximately €1.75 billion.
For BASF, a major attraction of Ciba is its strength in packaging where a large proportion of BASF’s €2 billion annual sales is in the production of flexible and rigid plastic substrates as well as adhesive raw materials.
Ciba’s €700 million sales in packaging is predominantly in pigments, light and process stabilizers and UV absorbers, including photoinitiators.
Through the branding of its Xymara pigment range, Ciba has been establishing a powerful position in effect pigments, especially in the packaging sector. In addition it has a range of high performance organic pigments which have been making inroads into the segment.
At last month’s 100% Design exhibition in London, the company showcased a new array of Xymara pigments, including ones with color-travel effects in which the color shade varies as the viewing angle changes. The pigments comprise transparent coatings with metal and pearlescent effects on a base coat of high performance organic pigment. The company has also developed hybrid pigments consisting of combinations of effect and organic pigments.
Printed Electronics
BASF is also hoping to utilize Ciba’s R&D and product development in electronics, particularly printed electronics. BASF has pinpointed electronics as one of its priority growth sectors.
Over the last few years, Ciba has established partnerships and collaborations in printed electronics with universities, research institutes, technology development companies and startups.
Among its research alliances is one with VTT Technical Research Centre of Finland, which is concentrating on novel materials and processes for printing organic electronics. In June the partnership was expanded to cover new printing systems for high-volume packaging and diagnostics. VTT will carry out trials on roll-to-roll equipment so that processes and materials can be developed in parallel.
At its main site at Ludwigshafen, Germany, BASF has set up a Joint Innovation Lab (JIL) in organic electronics to conduct research with industrial companies, universities and research institutes both in and outside Germany.