DSM wary of M&A deals that need carving up

HEERLEN, Netherlands Wed Jun 15, 2011 8:27am EDT

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HEERLEN, Netherlands (Reuters) - Dutch vitamins giant DSM (DSMN.AS) is cautious about acquisitions that it would have to carve-up to extract the businesses it wants to offset currency costs at its nutrition unit and expand its product mix.

DSM, the world's leading vitamins maker, bought U.S. baby food ingredients maker Martek for $1.1 billion in February and is sitting on a war chest of more than 2 billion euros. It has repeatedly said it is on the lookout for suitable acquisitions.

"What is DSM going to spend its money on? There are multiple options," said Stephan Tanda, DSM's board member responsible for the nutrition unit. "I'm not saying there is plenty to buy, but the deal flow is sufficient that we are busy."

Investment bankers consider French animal feed group Provimi -- which is up for sale -- is a possible target and when asked about it, Tanda told Reuters that some parts of Provimi would be a good fit, but that other parts were of "no interest" to DSM.

He declined to say whether DSM would bid for Provimi.

"They are active in very different areas -- compound feed, complete feed. That's not an area of interest to us. Do they have some pre-mix plants we would be interested in if they were up for sale by themselves? Certainly," Tanda said.

He declined to say whether DSM might bid with a partner for Provimi.

On other possible targets, Tanda said DSM liked parts of U.S. specialty chemicals group ISP but added that there was a "lot of pain" involved when it comes to carving up acquisitions.

ISP was bought by Ashland (ASH.N) in May for $3.2 billion.

A Dutch newspaper reported that Dutch animal feed peer Nutreco NUTR.AS was mulling a bid for Provimi and Tanda said such a scenario could also prove positive for DSM.

"Nutreco is a large customer of ours ... it is always good if you have a large customer," he said. "It is not as though we compete with each other every day on a fierce basis because you have different geographic spread, a different offering."

He said DSM was carefully watching price and synergies.

"Look at our words and actions ... Danisco DCO.CO we were a happy seller, even though we would have loved to have that company, but not at that price. Chr. Hansen (CHRH.CO) we stayed away at that price. Martek we took," Tanda said.

In May, DSM tendered its 4.95 percent stake in Danisco to DuPont (DD.N), which has taken over the Danish food ingredients maker.

DSM did not make a rival bid for Danisco and also passed up the chance to buy Chr. Hansen which was listed last year.

Tanda said DSM now wants to boost Martek's sales in Europe, Asia and Latin America by adding contracts with smaller, or "tier two," local infant food companies. It already supplies Nestle (NESN.VX), Pfizer's (PFE.N) Wyeth and Mead Johnson (MJN.N).

CURRENCY COSTS

DSM's nutrition business is based in Switzerland and after currency hedges, the strong Swiss franc hit the unit's core earnings by 15-20 million euros in the first quarter.

Tanda said he expected the impact on nutrition's second-quarter earnings before interest, tax, depreciation and amortization (EBITDA) will be bigger than in the first.

"There's no running away from that," he said, adding that currency hedges DSM "did last year to this year are beneficial, but new hedges for future years are much less beneficial."

Tanda expects the nutrition business to report close to 3.5 billion euros in sales this year, after 3.01 billion euros in 2010 and Martek's $371.9 million in nutrition revenues.

He said he is "comfortable" the unit can stay within its targeted earnings before interest, tax, depreciation and amortization (EBITDA) margin range of 20 to 23 percent over five years.

DSM wants to cut costs, refocus its R&D, boost productivity or move production to lower-cost countries such as China, while acquisitions and product price rises will also help, Tanda said.

Some business leaders in Switzerland fear the franc could reach parity with the euro, threatening Swiss exports and jobs, but Tanda said DSM has no plan to move its nutrition unit.

"We certainly wouldn't pick up those plants and move them somewhere else," he said. "The Swiss franc situation ... does not jeopardize existing jobs, but it certainly will diminish our appetite for (more) jobs in the country."

(Reporting by Aaron Gray-Block; Editing by Sara Webb and Jane Merriman)

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