At midnight on Sunday New York time, BASF, a German chemicals group, hopes to have collected more than half the shares in Engelhard, a US catalyst maker, for which it fought a five-month takeover battle and set aside more than $5bn.
For Jürgen Hambrecht, chief executive, Monday will be a red-letter day. The deal would be another in a series of quick steps to reduce its reliance on the products that made BASF big: bulk chemicals and bulk plastics.
“Practically all the deals Mr Hambrecht has made in the last months were meant to reduce BASF’s exposure to the price cycles of basic chemicals,” says Jürgen Reck, an analyst at the bank Sal. Oppenheim in Cologne.
“He’s making use of the continuing strength of the chemicals cycle to invest BASF’s earnings in less cyclical business. [Mr] Hambrecht’s predecessors did the same but none of them did so many deals in so short a time span.”
In March, Mr Hambrecht bought the construction chemicals unit of Degussa, a German rival, for €2.8bn ($3.6bn); in May, he snapped up Johnson Polymer, a US-based resins maker, for €370m; and this month, Engelhard is set to follow for €4.4bn including debt.
Basic chemicals such as ethylene and propylene, and plastics such as polystyrene, go in to making thousands of products and demand for them is firmly tied to the fate of the economy. When manufacturers do well, as they have in the past few years, so does BASF. When orders thin, so do BASF’s.
The company is cagey about forecasts but most analysts, including Mr Reck, believe that the chemical cycle will dip from 2007 to 2009, not least because new production sites, many of them in the Middle East, will push supply up way over demand.
Since 2003, BASF saw bulk chemicals and plastics sales rise by 38 per cent to €19.8bn and operating profit triple to €2.5bn, outpacing the other units – high-tech chemicals, agrochemicals, and oil and gas – to contribute about half of sales and profits in 2005.
Good earnings, and the knowledge that upswings lead to downswings, persuaded Mr Hambrecht to commit BASF to the three acquisitions totalling €7.5bn as the third year of his stewardship of the company drew to a close.
The moves are designed to bolster what the company calls its performance products division. It sells high-tech substances that distinguish themselves through the clever things they can do rather than keen pricing.
Profits from selling high-tech substances are nowhere near as cyclical, BASF’s thinking goes. Construction companies will buy anti-graffiti coatings and paint-makers will still need resins as a base for their mixes even if the economy slackens.
Governments can create demand, also. BASF was keen on Engelhard because tighter emissions controls in Europe and the US look set to keep sales of catalytic converters for cars, trucks and factories at high levels.
China will in 2007 adopt new rules for exhaust gasses, spurring the €10bn global catalyst market to grow at 6 per cent a year until 2010 and at 5 per cent after that.
BASF’s new subsidiaries will raise group revenues by no more than €6bn, or one eighth of sales, to about the €50bn mark this year.
But analysts believe the annual gain of about €500m in operating profit could cushion the impact of falling chemicals sales and prices. Operating profit hit €5.8bn last year and it could easily fall by €1bn in the coming years as the price cycle turns.
“The acquisitions will allow [Mr] Hambrecht to make up for half of the profit decline which awaits him from the downturn in the cycle from 2007 to 2009,” says Lutz Grüten, an analyst at Kepler Securities in Frankfurt.
Mr Grüten says that Mr Hambrecht’s style of doing business is “a bit faster, a bit more dynamic” than that of his predecessors. With €5bn in annual cash flow and less than €4bn in debt, BASF’s finances signal yet more deals could follow.
During the battle for Engelhard, Mr Hambrecht never tired of pointing out that BASF had alternative targets in its sights.
Indeed, Eggert Voscherau, a member of BASF’s board, said on Friday that still more deals were possible: “We can’t afford to stand still.”
Get alerts on Financials when a new story is published