Evonik advances

Waking the Chemicals Giant

The lights are shining at Evonik but the shares don't look as glossy. Source: Nico Kurth/DPA

By the time the Essen-based chemical company Evonik’s annual general meeting ended Tuesday, a long-planned change in leadership had taken place. Christian Kullmann is relieving Klaus Engel at the helm of Germany’s second-largest chemicals company during a decidedly tumultuous phase in the industry.

The industry is in the throes of merger fever. Nevertheless, the new boss could conceivably sit back and relax if he were to listen only to the words of his fellow CEO, Hariolf Kottmann, of Swiss rival, Clariant. The day before, Mr. Kottmann had justified Clariant’s planned merger with the US’ Huntsman Corporation, saying that the development of the chemical industry over the next couple of years would be driven primarily by companies with at least a $13 billion turnover. But where Clariant and Huntsman are going, Evonik has already been for some time.

But things are not that simple in the chemicals business. Size alone is no guarantee of success either.

Compared to other companies’ recent results, Evonik’s performance looks a little disappointing.

This is evident from Evonik’s own performance. Neither the majority owner, the RAG Stiftung, the foundation that is ensuring that subsidized coal mining is discontinued in a socially acceptable manner, nor the small shareholders, would be pleased with those results. Being one of the largest specialty chemicals producers in the world has not at all translated into anything exceptional, or even above average. Evonik tends to look like chemistry’s dullard at the moment.

Revenues and operating earnings over the past five years have been stagnating or declining. Evonik also started the new year weaker than most of the competition, who are profiting from a veritable boom in the chemicals business.

Evonik shares were however able to keep pace with market developments in recent months. And many an analyst is now speculating as to whether the chemical giant might finally awake: Who will be the handsome prince that bestows a kiss on this sleeping beauty of the chemicals industry? First off, the new head of the company will most likely need to deliver a bit of progress and oversee the successful integration of the latest acquisitions, if he wants to burnish Evonik’s luster on the stock exchange.

At €31 ($34.70), the share was being quoted at a solid 5 percent below its initial listing in April 2013. During the same period, practically all of the larger European chemical companies – from Arkema, BASF, and Lanxess to Wacker Chemie – posted significant double-digit returns, the value of Bayer spin-off, Covestro, more than doubled since its IPO in 2015. Compared to all that, Evonik’s performance looks a little disappointing.

Of course, some of the basic conditions and the product range should not really be compared. Over the past decades, Evonik was once a conglomerate of chemical and other miscellaneous activities. It wasn’t, and still isn’t, an easy task to make a truly focused chemicals industry player out of that.

But as the development of the Essen-based group also shows, specializing does not always guarantee a way out of sluggish growth. Specialty chemicals sound good, and it’s a label the industry likes to flaunt. But at the end of the day, business is only as good as the competition allows.

Bearing this in mind, the Essen-based group may think the best way to drive growth is with more acquisitions, such as the takeover of Air Products’ plastic additives business, which cost more than €3 billion (around $3.3 billion), or the purchase of the silica business belonging to US company, Huber.

Financially, the group could probably easily afford another similarly sized purchase. And the head of the Evonik Industries supervisory board, Werner Müller, is already calling for ideas for the next acquisitions from the new chief executive, even before the last takeovers have been consummated, and digested.

But it’s highly doubtful that the chemical giant can escape its quandary simply by purchasing more. In the race to consolidate, the folks from Essen are not in pole position; their situation has worsened over the past few years. While their stocks were plodding along, all around them other shares’ values were rising.

Moreover, the wave of mergers has seen the pool of candidates for a takeover shrink. The merger of Huntsman and Clariant makes that abundantly clear. With a valuation of €12 billion, a group like the Dutch DSM, which would theoretically be a perfect fit for Evonik, is out of reach for Evonik, at least in terms of a classic takeover. Any such deal would only be possible as a type of alliance among equals.

And that would depend on whether Mr. Müller and his RAG Stiftung are willing to bid farewell to their majority. This means that the prince who will wake the German chemical industry’s sleeping beauty is not currently sitting in the Evonik head office, opposite Essen’s main train station. That lucky guy is a couple of streets away, ensconced at the headquarters of the RAG Stiftung.

To contact the author: hofmann@handelsblatt.com.

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