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BASF Strikes Back

German chemical giant says streamlining and acquisitions set the stage for North American success

by Alexander H. Tullo
October 16, 2006 | A version of this story appeared in Volume 84, Issue 42

Credit: BASF
Engine laboratory technician Mark Wojcik prepares an emissions test on a Volkswagen New Beetle at BASF Catalysts' testing facility in Union, N.J.
Credit: BASF
Engine laboratory technician Mark Wojcik prepares an emissions test on a Volkswagen New Beetle at BASF Catalysts' testing facility in Union, N.J.

BASF is on the offensive in North America. While many chemical companies are investing as much as possible in Asia and the Middle East, BASF—which was the second-largest chemical company in the world last year, behind Dow—has undertaken an aggressive strategy to expand and improve profitability in a region that it stresses is still the world's largest chemical market.

In a recent press tour of their North American operations, BASF executives highlighted the changes they have made over the past five years, including the most dramatic: the $5.6 billion acquisition of catalyst maker Engelhard.

Klaus Peter Löbbe, the BASF executive board member responsible for North America, told reporters at a press conference in Iselin, N.J., that size, continuing growth, and "unmatched resilience" make the U.S. an attractive place to invest. "There has been much talk about impressive growth rates in China," he said. "However, despite growth in the Far East, the U.S. is still the largest single market for chemical products and will be for many years to come."

Credit: BASF
Credit: BASF

To Löbbe, BASF is now experiencing the culmination of its expansion efforts in North America. Those efforts, he said, have made the firm the region's second largest chemical company. Including recent acquisitions, BASF claims to have roughly $15 billion per year in North American sales, second only to Dow Chemical and ahead of DuPont and ExxonMobil Chemical. "We have a long history in North America, but in the past decade, we have taken steps that have amounted to a quantum leap in BASF's presence and impact in North America," Löbbe said. "That is what makes this an exciting time for the company."

By next July, BASF intends to have completely absorbed three acquisitions—Engelhard, the waterborne coating resins company Johnson Polymer, and Degussa's construction chemicals business.

BASF's bid for Engelhard had been shaping up to be a hostile takeover drama. Its January offer of $37 per share was spurned by Engelhard's board, which made its own counteroffer. BASF geared up for a proxy fight to seat deal-friendly directors on Engelhard's board, but Engelhard eventually accepted BASF's "final offer" of $39 per share. BASF closed the deal in June.

BASF acquired a company that generated about $4.6 billion in sales in 2005. Few of Engelhard's operations overlap with BASF's. About 37% of Engelhard's 2005 sales came from catalysts, and the firm has a 30% share of the global market in catalysts for automotive catalytic converters and refinery fluidized catalytic crackers. It also makes polyolefin catalysts. BASF's catalyst operations, on the other hand, are focused on catalysts for chemical operations.

About 46% of Engelhard's 2005 sales were in precious-metals trading, a business where BASF has no presence. BASF says the unit, which manages procurement of platinum group metals for catalyst clients, serves an essential function and will remain with BASF. "There was never any idea to divest this business from our present portfolio," Löbbe said. Engelhard's line of color and special effects pigments, about 16% of Engelhard's 2005 sales, will be absorbed into existing BASF businesses.

The Engelhard purchase isn't about cost synergies, it is about growth, Löbbe said, drawing a contrast with the 2001 merger of petrochemical giants Dow and Union Carbide. "Since we do not produce the same kinds of catalysts or pigments as the former Engelhard, there is limited overlap between our businesses, unlike the merger between Dow and Union Carbide a few years ago," he explained. "Engelhard's capabilities uniquely complement our own."

Löbbe added that tightening emissions standards and increased concerns about energy present natural growth opportunities for BASF. "Often catalysts offer the solutions to meet these requirements, as they can improve air quality and save energy and raw materials by making chemical reactions more efficient," he said. "Therefore, our new global catalysts division fits nicely with our sustainable business platform."

Moreover, Löbbe said, Engelhard increases his firm's exposure to the automotive industry, to which BASF already markets coatings and engineering plastics. "We only acquire businesses or companies where we can really prove to make a difference versus our competitors," he said. "Our combined product portfolio extends BASF's position as a one-stop supply of innovative coatings, plastics, performance chemicals, and catalysts."

Themis Themistocleous, a U.K.-based analyst with UBS, says BASF paid full price for Engelhard. But he notes that the acquisition reduces BASF's overall cyclicality and gets the firm into the automotive catalyst business, which offers growth potential driven by legislation and not necessarily by the economy. The process catalyst business may be more cyclical, but it will strengthen BASF's hand in catalyst chemistry, he adds.

In one area of overlap, however, BASF will seek to improve costs: headquarters operations. BASF's North American headquarters in Florham Park, N.J., is only about 25 miles away from Engelhard's in Iselin. "It doesn't make sense to have two headquarters so close together," Löbbe said. Some administrative jobs will be cut, he added.

In addition to Engelhard, BASF is also integrating Johnson Polymer, which it purchased from JohnsonDiversey for $470 million in July. The company says the deal builds on its existing business in resins for ultraviolet-curable and high-solids coatings.

BASF recently decided to move the business from Sturtevant, Wis., to Wyandotte, Mich., where BASF currently produces coating resins and polyurethane products. The company is spending $100 million in Wyandotte to build a new emulsions and resins plant by 2009.

With the $3.4 billion acquisition of Degussa's construction materials business, construction will be an increasingly important market for BASF. Löbbe reminded reporters that every new house contains about $12,000 worth of chemical industry products and that, despite the recent slowdown in new housing starts, construction in North America is still proceeding at a robust rate.

Löbbe claimed that his company is finished with large acquisitions for now. "To have three acquisitions now running is great," he said. "But it puts a heavy burden on all of our folks within the organization to integrate them. At this moment, another acquisition would be a big stretch for us."

In addition to integrating the three large purchases, BASF is also completing a revamp of its North American operations. To measure its financial performance, BASF looks at its North American pretax profits as a percentage of sales versus a peer group of top U.S. firms such as Dow, DuPont, and Praxair. Until 2005—other than during a brief period in 1999—BASF has been outperformed by its peers; its margins hit a low of about -12% in 2001, below the peer group average of about 2%.

However, in 2005, BASF beat this peer group, a feat that Löbbe attributes to a restructuring program launched in 2002 that is now concluding.

The company reduced costs by $400 million annually and has cut about 4,000 positions in North America, 30% of its total. It also overhauled its portfolio, selling or closing 13 North American plants.

The company made some smaller acquisitions over the restructuring period as well, including Callery Chemical, Huntsman's toluene diisocyanate business, and Sunoco's plasticizers business. It also continued to build plants. "We put our house in order, and this laid the foundation for our strategy for profitable growth," Löbbe said.

BASF plans $500 million in capital spending both this year and next. At its Freeport, Texas, complex, the company is building a superabsorbent polymers unit that is scheduled to open next year and replace smaller plants in Aberdeen, Miss., and Portsmouth, Va. At Freeport, the company is also building a nylon 6 polymer facility that will replace an older, smaller polymer unit in Enka, N.C., when it opens next year.

At its Geismar, La., facility, BASF is investing $125 million to expand polyols production by 2008. The company is also considering building a propylene oxide plant using the hydrogen peroxide-based technology it developed with Dow Chemical (C&EN, Oct. 9, page 22). At its Pasadena, Texas, site, BASF is converting a 2-ethylhexanol unit to make 2-propylheptanol, a raw material for the BASF plasticizer dipropylheptyl phthalate.

Between financial streamlining, portfolio adjustments, and acquisitions in markets BASF believes will remain strong, BASF is positioned for growth in North America, Löbbe argued. "Innovation, disciplined capital investment, and intelligent and wise acquisitions—this is the foundation for the future business success of BASF in North America," he said.


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