To help shift its business away from the volatile active pharmaceutical ingredient (API) area, Lonza plans to acquire Arch Chemicals in a $1.4 billion cash deal. Although it will still have a leading position in custom manufacturing, the Swiss company will benefit from a new 15% share of the $10 billion-per-year antimicrobial market.
The deal offers a “unique opportunity” and “marks the next step of Lonza building a world-class life science company,” Lonza CEO Stefan Borgas said in a conference call with analysts. The combined company will have about $4.3 billion in annual sales, with 43% in microbial control products, 35% in custom API manufacturing, and 22% in life sciences and nutrition products.
Custom manufacturing, especially for biologics, currently accounts for more than half of Lonza’s sales, whereas microbial control is about 14% of sales. Acquiring Arch will help strengthen and balance Lonza’s portfolio in many ways, Borgas said, and Lonza can improve Arch’s profitability. He also expects that Lonza’s custom manufacturing business will continue to grow.
Despite Borgas’ assurances, investment analysts question the attractiveness of buying a less profitable, cyclical, and mature business at what some call a hefty price. Lonza’s dramatic shift away from pharmaceutical ingredients is “an effort to rebalance the business toward industrial end markets to reduce the risk attached to the declining opportunities within recombinant production technology,” Citigroup Global Markets analyst Dominik Frauendienst told clients.
About 86% of Arch’s $1.4 billion in annual sales falls into four microbial control areas: water products, wood protection, industrial biocides, and personal care. Lonza will support Arch’s decision to find a buyer for its performance products business, which had sales of $186 million in 2010.
Arch has 23 primary manufacturing and research facilities around the world and employs about 3,000 people. Lonza operates six antimicrobials production locations with a workforce of 550. The acquisition will expand Lonza’s business in China, India, Brazil, and South Africa, which are among the fastest-growing markets for microbial control.
Because the companies’ products are complementary, Lonza notes, antitrust issues should be avoided and sales in the firms’ respective markets have the potential to expand. In fact, Lonza expects to generate $40 million in new sales within three years by leveraging the technical capabilities, applications expertise, and extended reach of the two businesses. New formulations should emerge quickly by combining already approved microbial agents, and the company’s larger scale will enable it to invest in R&D for new products, Borgas explained.
Lonza expects $50 million in annual cost savings, largely by eliminating redundant administrative functions. Taking advantage of the strong Swiss franc, it will finance the purchase entirely through debt. After buying Arch stock—at a 37% premium to the firm’s recent share price—and getting regulatory approvals, Lonza hopes to close the deal later this year.