PARIS/AMSTERDAM The 3.5 billion euros ($4.8 billion) acquisition of French chemicals group Rhodia SA RHA.PA by Belgium's Solvay SA SOLB.PA, due to complete this week, is set to herald a further flurry of dealmaking as CEO Jean-Pierre Clamadieu shifts the focus of the combined group.
Clamadieu, hitherto chairman and CEO of Rhodia and who already has extensive restructuring experience, will likely seek bolt-on deals to boost Solvay's specialty chemicals business and reduce its exposure to economic downturns.
Analysts expect Clamadieu will also aim to carve-off some of the lower-margin operations of Solvay, which will become one of Europe's biggest chemical groups with sales of about 12 billion euros, while keep its founding family on side.
"The new Solvay-Rhodia combination lacks focus. Solvay is still very much into commodities such as soda ash or PVC, which investors don't like because it's too sensitive to the economic cycle," ABN AMRO analyst Mark van der Geest said.
"Clamadieu could focus the business more, clean up the portfolio and make a shift from commodities to specialty chemicals."
The general trend in the sector is to focus more on specialities which have higher profit margins, and away from commodity products where margins offer little protection from high overheads which hit especially hard in economic downturns.
Solvay is the world's leading maker of soda ash, a key raw material for glass, and a world leading producer of polyvinyl chloride (PVC), used in the hard-hit construction sector.
Rhodia is a specialty chemicals maker, with products which can range from skin creams and shampoos to tyres and flat screens and support higher margins than commoditised plastics.
BREAK FROM TRADITION
The Solvay-Rhodia merger combined with Clamadieu taking the reins could transform Solvay from a company known for a cautious strategy into a stronger, more ambitious multinational that stands to benefit from a strong presence in emerging markets.
The choice for Clamadieu marks a break with tradition at the near 150-year-old company. As the first non-Belgian CEO of Solvay, he will need to win the trust of management and the founding family which through Solvac owns a 30 percent stake.
"It's probably an advantage that he's from outside the company. He has no connections, no friends within the company, so that should make it easier to decide on what makes sense and what doesn't," CA Cheuvreux analyst Klaus Ringel said.
Industry observers say Clamadieu has a strong operational record and is widely respected having steered Rhodia away from near bankruptcy in 2003 and managed to renegotiate credit lines with banks to then rebuild the group.
That could make it easier for him to implement changes. His selection as Solvay's next CEO has already helped boost Solvay shares. "He comes across very well and is a good communicator," one analyst said.
Others warn that he needs to tread carefully, keep a strong balance sheet and a continuity in dividend payments, which may limit room for big acquisitions, at least in the short term.
Still, ratings agency Moody's has put Solvay's credit rating under review, saying that with Clamadieu at the helm, Solvay's "conservative approach" to leverage may gradually dissolve.
As a hybrid drugs-chemicals company prior to selling its pharma unit to Abbott Labs (ABT.N) in 2009 for 4.5 billion euros, Solvay's balance sheet needed to take into account the possibility of contingent liabilities related to its drugs unit.
"It is entirely natural that as the company transforms to a full chemical company, its balance sheet is likely to move away from how Solvay had maintained it for a very long time," Moody's credit officer Elena Nadtotchi said.
For now, however, Clamadieu and Solvay's management will need to blend Rhodia into Solvay's business and work on meeting their targeted 250 million euros in synergies.
At Rhodia, Clamadieu is known for first rescuing the company, but also for expanding into emerging markets, the product of its M&A strategy, which saw it buy last year China's Feixiang Chemicals, a maker of surfactants used in home and personal care products, for an enterprise value of $489 million.
Those acquisitions and Rhodia's improved earnings eventually caught the eye of Solvay.
"I'd expect them to do bolt-on acquisitions for the time being, acquisitions of technologies, such as battery or organic LED technologies, or start-up companies which have a good and promising technology," Cheuvreux's Ringel said.
(Editing by David Holmes)