ZURICH/DUBAI (Reuters) - Clariant (CLN.S) said on Thursday that joint venture talks with top shareholder Saudi Basic Industries (SABIC) (2010.SE) had been shelved due to differences over asset prices, a further setback for the Swiss chemicals maker whose CEO abruptly quit this week.
Shares in Clariant plunged 11% as the company also announced a first-half loss, hit by charges linked to a European probe over competitive practices.
Clariant and SABIC, which has a 25% stake in the Swiss group, had been working to combine Clariant’s additives and specialty masterbatches businesses - including colors, additives and special effect concentrates for plastics used for products such as packaging - with parts of SABIC’s specialty chemicals operation. They had hoped to create an operation with 3.1 billion Swiss francs ($3.14 billion) in annual sales controlled by the Swiss company.
Clariant’s CFO Patrick Jany told an analysts’ call that the company would now have to rework its strategic plan drafted in September 2018, since it can no longer count on the joint venture with SABIC boosting growth, helping cut costs and lifting profits.
Market conditions left an agreement on how much Clariant would pay for the SABIC assets out of reach, Jany told Reuters.
“From the sellers’ side, it wouldn’t make sense for them, they probably would receive less proceeds than they expected,” Jany told Reuters. “And for us, it doesn’t make sense, because we would probably have to, in our view, pay too much for the business.”
Even before the JV flopped, Clariant had been in upheaval, announcing on Wednesday that CEO Ernesto Occhiello, who joined from SABIC just 10 months ago, was resigning with immediate effect.
Shares in Clariant have now fallen 13% since Occhiello quit on Wednesday.
Clariant Chairman Hariolf Kottmann told Thursday’s analysts’ call that Ochiello had a “personal and private reason” for leaving the company that was unrelated to the stalled SABIC joint venture talks.
Clariant said it would now look to sell its specialty masterbatches business along with standard masterbatches that were already on the auction block.
It previously said it expected to reap 1 billion-2 billion francs from asset sales.
It now expects more, but declined to give a figure, with the cash destined for technology investments, eliminating debt and to shareholders.
“Our assessment is, there’s more value-creation in selling masterbatches as a whole, rather than splitting it,” Jany said.
Analysts said the about-face raised questions about Clariant’s future.
“What a mess!” Baader Helvea chemicals analyst Markus Mayer said in a note, adding he sees Clariant increasingly as a takeover target.
“SABIC has an interest to fully take over Clariant. With the resignation of CEO Occhiello, who came from SABIC, and the termination of the JV negotiations, we think it is just a matter of time SABIC will come up with a takeover offer.”
Jany said SABIC has not given any signals on changing its current stake.
With a market capitalization of $88 billion, SABIC is 13 times bigger than $6.66 billion Clariant.
SABIC said it “looks forward to continuing the discussions with Clariant once conditions improve”.
Saudi oil giant Aramco this year reached an agreement with the state-run Public Investment Fund to buy its controlling stake in SABIC for $69.1 billion.
Mazen al-Sudairi, head of research at Al Rajhi Capital, said market conditions might be a factor for the shelving of the JV, as petrochemical prices are down globally and have hurt sector results.
“Whenever there are any concerns or changes related to the economic cycle, M&A should be put on hold,” he said, adding SABIC learned that lesson when its $8 billion acquisition of a unit of GE in 2007 was followed by the subprime mortgage crisis.
SABIC bought its stake in Clariant in 2018, arriving on the scene as a white knight to end the Swiss company’s fight with activist investors who had previously blocked the Swiss company’s proposed $20 billion merger with U.S-based Huntsman Corp. (HUN.N)
Clariant on Thursday reported a first-half net loss of 101 million Swiss francs versus a profit of 211 million a year earlier. Sales were steady at 2.2 billion francs.
Profitability fell at two of the three businesses Clariant plans to keep, including soap ingredients and its catalysis business that sells chemicals that help speed up reactions.
The results were affected by a 231 million franc provision Clariant set aside for an ongoing competition law investigation by the European Commission.
“The first half-year 2019 was admittedly challenging,” said Kottmann, Occhiello’s predecessor as chief executive who has assumed his responsibilities until a successor is found.
Kottmann said he hoped to name a permanent replacement by the end of 2019 or early 2020.
Reporting by John Revill in Zurich and Saeed Azhar in Dubai; additional reporting by John Miller in Zurich and Marwa Rashad in Riyadh; editing by Jan Harvey/ Jason Neely/Susan Fenton