Sept 24 - BASF's planned acquisition of Becker Underwood reinforces our view
that European chemicals producers will target growth in mature markets through
small- to mid-sized deals that make them more resilient to demand cyclicality
and input price volatility, Fitch Ratings says. These acquisitions will focus on
high value-added products rather than commodity chemicals, where European
producers are becoming less competitive.
BASF will end 2012 having both sold and bought assets tied to agricultural
end-markets. In April, the company completed the sale of its Antwerp-based
nitrogen fertiliser business to Russian group Eurochem for EUR830m. It is now
spending USD1bn on the acquisition of US crop protection producer Becker
The key factors differentiating the two businesses are value-add and
technological content. This is in our view, a perfect illustration of the
strategic choices European producers are bound to make in mature markets.
The fertiliser business that was sold produced commodity chemicals with a strong
dependence on petrochemicals feedstock. Aside from the high initial capital
investment, barriers to entry are low. Competition favours producers with
large-scale assets and access to low-cost raw materials. European players are at
an increasing disadvantage compared with Middle Eastern, Russian and more
recently US producers (following soaring shale gas production).
Conversely, the barriers to entry remain high in crop protection chemicals.
These typically have strong innovation content and R&D programmes for new
compounds that span 10 years or more. Competiveness is based on
value/performance rather than price/volume. BASF's main rivals are Syngenta,
Bayer and Dupont.
With these deals, BASF reduces earnings cyclicality. At the same time, it
maintains exposure to agricultural end-markets and the strong demand associated
with demographic growth, reducing arable land and increasing pressure on food
supplies. Acquisitions of this size will not harm the group's 'A+'/Stable rating
- unless shareholder-friendly policies or large debt-funded acquisitions pushed
net funds from operations leverage to 2.0x for a sustained period.
This is not to say that European producers are abandoning non-specialty
chemicals. Spending towards these segments is shifting towards markets with
robust growth potential. Fitch-rated western European players are all engaged in
mid-to-large scale expansion plans designed to increase their exposure to
emerging economies, often in partnership with domestic producers.
BASF's current investment projects include world-scale facilities in China,
Malaysia and Brazil and the group targets sales of EUR20bn in Asia-Pacific by
2020, 70% of which will be produced locally. DSM and Akzo Nobel are expanding
existing capacity in China and want to double their revenues in the country by
2015 (from 2010 levels) while Lanxess plans to spend EUR435m over the next three
years on new synthetic rubbers facilities in Singapore and China.
We believe that issuers are likely to prioritise investments in these markets to
hedge against potentially protracted economic woes and high levels of
uncertainty in advanced economies.