Issue Date: January 2, 2006
RAG To Take Over Degussa
German mining company RAG, owner of a 50.1% stake in Degussa, will acquire the 43% share in the specialty chemical giant now held by E.ON, effective July 1. The purchase is expected to cost about $3.4 billion. RAG will then buy out Degussa's remaining minority shareholders.
The deal, part of RAG's effort to de-emphasize coal mining and go public, will effectively bring to an end Degussa's 132 years as an independent company. But that independence has been precarious since 2002, when RAG first acquired a stake in Degussa through a shares swap with E.ON.
Consultant David Ingles, who just completed a study on the changing structure of the global chemical industry, says RAG's ambitions have been casting a shadow over Degussa, which had 2004 sales of $13.6 billion and calls itself the world's leading specialty chemical company. "I've always had negative vibes regarding the ownership structure of Degussa with these great big German energy companies shuffling bits of paper around," he says. "It's never been a stable situation."
Moreover, Ingles adds, even though Degussa management has pared down the number of businesses it operates, too many are still at least semicommodity rather than true specialty businesses.
However, Degussa is quite specialty oriented compared with the chemical businesses that RAG long operated. In 2002, when it purchased the Degussa stake, RAG had chemical sales of just over $3 billion, including Rütgers, whose chemical operations included Bakelite; Isola, a printed circuit board chemicals maker; and the Stockhausen textile chemicals operation.
Since then, RAG has divested some 280 businesses in chemicals and other areas with combined sales of roughly $5.6 billion. Bakelite, for example, was sold to investment firm Apollo Management and is now part of Hexion Specialty Chemicals. And five units of Rütgers Chemicals—fine chemicals in the U.S. and Germany, Rütgers Organics, performance chemicals, and Rütgers Carbo Tech—went to International Chemical Investors.
That has left RAG to concentrate on Degussa, which it fully consolidated into its financial accounts in mid-2004.
RAG Chairman Werner Müller said in June that his company "has successfully concluded the most extensive restructuring in the history of the group, within an 18-month period. Our structure for the future of RAG has already clearly taken shape."
The deal with E.ON caps Müller's plan to reshape RAG from its original coal-mining business to a company specializing in energy, chemicals, real estate, and mining. Müller and his team aim to launch RAG on the stock market, a development propelled by the 2005 end of coal-mining subsidies from the German government. A consortium of five German industrial and finance companies currently owns RAG.
It was partly to fund the E.ON buyout that RAG, in early December, pressured Degussa to seek a buyer for its profitable construction chemicals unit. Within two weeks, fellow German firm BASF had requested exclusive negotiations to acquire the business, which accounts for about 14% of Degussa's annual sales and has been valued by stock analysts at roughly $2.4 billion.
And rumors are swirling around Degussa that more of its businesses, including its fine chemicals operations, are to be sold off as well.
While Degussa will face uncertainty for some time, RAG executives maintain that the deal is good for the specialty chemical company. "The intended complete takeover of Degussa is an important marker for further development of RAG to an energy, chemical, and real-estate group," says Hubertus Schmoldt, chairman of the German chemical trade union IG BCE and vice chairman of the RAG supervisory board. "Integration into the RAG group offers Degussa good future prospects."
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