The mid-sized chemical company Lanxess is in the midst of a much-needed and radical overhaul of its business, and its chief executive said its strategy has been given a shot in the arm in the form of an investment by Warren Buffett.
Mr. Buffett took his stake just as Ken Griffiths, head of the hedge fund Citadel increased a short position on Lanxess shares and markets are now watching to see which of the two investment gurus turns out to be correct in their assessment of the company. At first glance it appears Mr. Buffett’s optimism has won out: Citadel has already begun unwinding its position.
Lanxess Chief Executive Officer Matthias Zachert said Mr. Buffett’s investment is a clear sign that he should carry on the path he has already chosen. “When he invests, that means: He is committed to the company in the long term and has deep confidence in his business model,” he said.
Cologne-based Lanxess was spun off from Bayer in 2004, and is just emerging from a crisis.
The former chief executive Axel Heitmann had decided to make synthetic rubber, used in car tires, Lanxess’s core business. The decision turned out to be a mistake. The rubber market got hit by excess capacity and prices declined to the point that Lanxess was pushed into the red.
When Mr. Zachert took office in 2014, he quickly realized Lanxess could not keep up in the competition with mass chemical providers from Asia and the Persian Gulf. As a first step, he spun off the rubber business and incorporated it into a 50/50 joint venture Arlanxeo with Saudi-Aramco, the world’s largest oil producer. The joint venture is guaranteed until 2021 and many expect the Saudis will completely take over after that point, although Mr. Zachert is making no official comment about that possibility.
He is clear however that he wants to move towards adhesives and paints. Last year, he spent €2.4 billion buying Chemtura, a US company that specialists in flame retardants. Lanxess is now in the midst of integration and is developing a new division with Chemtura at its core.
There is little doubt Warren Buffett is into specialty chemicals at the moment. In April, he attended the town hall meeting of Lubrizol, a company that makes adhesives, sealants and fuel additives among other things. Mr. Buffett has held a stake in Lubrizol for some time, but he was unusually effusive in praise for the group this past spring, praising its business model and making it clear he wants more companies like that.
The people who run his fund – Berkshire Hathaway – paid attention. Seven weeks later, in late May, Berkshire Hathaway acquired a 3 percent stake in Lanxess. The Buffett name was enough to send the Lanxess shares, which are listed on the midcap MDax index, shooting up by 5 percent.
Lubrizol and Lanxess are following a similar strategy, moving away from the capital-intensive mass chemicals business and focusing more heavily on lucrative special applications, such as chemical additives for lubricants and paint, as well as high-performance plastics. Markets have begun to speculate whether Mr. Buffett could be working his way toward a future merger of the two companies, but Mr. Zachert said the subject has not come up.
“We have no clue about this, and nothing has been said to us about this. We are not planning anything in this direction either,” he said. “Berkshire Hathaway knows the attractiveness of the additive business and sees the value we can create with the takeover of Chemtura.”
Mr. Buffett’s investment manager, Ted Weschler, who had been travelling through Germany looking for companies to buy said he was simply looking for long term investments. “We buy when others don’t have the confidence to do so,” he said. “We take the time to think about where a stock will be in five years.”
Five years should be just how long it takes Mr. Zachert to get Lanxess firmly back on its feet. For now is focusing on integrating Chemtura, but he underscores that further acquisitions are possible. “Lanxess had to re-position itself in past years, get the costs under control and the debt down. We have achieved this very quickly and are in a position to make acquisitions,” he said. “We will certainly participate in the further reorganization of chemicals industry through more acquisitions. But we’re in no hurry.”
Bert-Friedrich Fröndhoff leads a team of reporters that covers the chemicals, health care and services industries at Handelsblatt. To contact the author: firstname.lastname@example.org.