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DSM Details Reach Response

Chemical firms across Europe and beyond are having to come to terms with Reach, the European Union's recently introduced environmental legislation. Multinationals and small companies alike will be affected by the legislation. Here's an uncut and candid detail from specialty chemicals firm DSM on how it is approaching Reach.

DSM's input is from Environment Manager Jan Berends and DSM Board Member Jan Zuidam.

As a company involved in both fine and industrial chemicals, what are the main challenges you face in preparing for the registration phase of REACH next year?
First of all we are working on a complete inventory of all substances that are in our products, raw materials and intermediate. All these substances have to be 'pre-registered' before the end of 2008. Our suppliers have to register the substances they produce or import, DSM has to register the substances in our intermediates and our products. We also collect all information that we have about the relevant substances that is needed for the registration.
In 2007/2008 we will have to assure that all essential raw materials will be (pre-) registered. We will ask our suppliers. In case suppliers are not wiling or not able we will have to act ourselves (register, change of suppliers, etc.)
We are also aligning our risk assessments, because our suppliers need to know the use and exposure of the substances they deliver to DSM. REACH requires that this is mentioned in the registration.
Main challenge is to do this 100% for over 500 products and over 5000 - 10.000 raw materials and thousands of suppliers.

How will the new regulation affect your activities in practice? (i.e.: which sectors of your activities and/or products will be affected first or most heavily?)
On short term extra work as indicated above. The largest impact we now expect is on sourcing of raw materials. E.g. additives (even non-hazardous) might be no longer available on the EU market because the importer/producer does not want to take the burden of registration. However we have to explore this better and not speculate. It should be taken into account that the period for registration for smaller volumes lasts until 2015 of even 2018. So we have to see and act accordingly.

How do you see REACH as an impediment to DSM’s activities? Conversely, how do you see the regulation as an opportunity for your company?
In first instance there will be uncertainty which is not good for the business in EU. There might be some opportunities, however as long as the EU is different from other parts of the world you can argue whether this might really turn into a benefit. Replacing hazardous substances by less hazardous has been a drive already for many products already for a long time. Companies already have the 'duty of care' It remains a question what the added value of REACH will be.

Do you expect your company’s results to improve or deteriorate as a result of REACH? Why? Are you planning to relocate some of your activities?
We now do not expect big impact relative to the trend. Probably we can benefit to some extend from our bio-based orientation (less hazardous substances used and produced) and our long history of responsible care activities (e.g. product stewardship, quality of product information, etc.)

If you were to introduce changes to the regulation what would they be? What would make REACH work better in your view?
I would look for simplification of the registration dossiers depending on the type and the use of a substance. You don't have to know 'everything about everything', but just what is relevant in the different uses. So a more risk based approach. This in fact is the approach as applied in the EOCD HPV-program. And rather than making it full proof in the EU I would spend some energy in global harmonization, since products are being produced and used worldwide.

--Alex Scott, Senior Associate Editor, Chemicalweek magazine

Credit Crunch May Freeze M&A

The global credit squeeze that has shaken debt and equity markets during the past few weeks may cool the feverish pace of industry M&A. Banks are left holding debt of about $400 billion in uncompleted management and leveraged buyouts worldwide, according to estimates compiled by Baring Asset Management (London). Several big chemical deals are in that pipeline, including Sabic-GE Plastics, Basell-Lyondell, Hexion-Huntsman, and Carlyle-PQ Corp. Industry deals with committed financing are likely to proceed, say M&A advisers that CW contacted earlier this month. However, the relationship between buyers and their lenders could become tense if banks are stuck with debt they cannot sell on the bond market. That will curtail further lending until banks are able to clear the backlog. Most bankers expect a recovery by early 2008, citing an overall strong economy. “This is a different situation than what has happened in the past,” says Richard Whitney, managing director/chemicals at Credit Suisse (New York). Lenders have clamped down despite low default rates and relatively strong earnings and valuations, Whitney says. “Credit supply and demand is out of balance right now. It is not just in chemicals. It is on a global scale. There are so many large transactions that need financing.” Borrowing costs will rise as lenders demand higher risk premiums, analysts say.
“We think this is more of a correction or pause,” says Ron Kahn, head of the debt private placements group at Lincoln International (Chicago). “If you go back to the last serious credit crunch, back in 2001, it was driven by defaults and bad credits.” But the drivers are different now as defaults are low and earnings strong. “This has nothing to do with the fundamentals. It’s purely a liquidity issue,” Kahn says. Deals already in process are progressing, says Chris Cerimele, senior v.p. at Lincoln International. However, sale processes that were planned or just starting are likely to be delayed until after Labor Day, as buyers and sellers wait for the situation to stabilize. Banks are likely to tighten lending terms going forward, analysts say.
“M&A could be a tale of two cities for each half of the year in 2007,” says Peter Young, president of Young & Partners (New York), an M&A advisory firm. “There are enough announced and completed first-half deals so that 2007 will still be a pretty active year. The second half is going to be tough, however.

Rohm and Haas Loses Taste for Salt

Rohm and Haas (R&H) says it is considering “strategic options” for its salt business, which could include a divestment or spin-off. The company says it expects to make a decision by year-end. R&H’s salt business posted sales of $505 million in first-half 2007, an increase of 19% from the prior-year period. Earnings for the six-month period were $37 million, an increase of 85%, in line with improved sales performance, and offsetting higher operating costs, R&H says. Revenue increased on stronger pricing in the industrial and consumer markets, as well as increased demand for ice-control salt and other bulk products, R&H says. R&H’s salt business accounts for roughly 10% of its revenues and includes the Morton Salt name and trademark, including the image of the Morton Salt umbrella girl, a well-recognized consumer product symbol in North America. Also, R&H will no longer seek to maintain credit ratios consistent with an “A” rating, according to quarterly regulatory filings made late last month. “Rather, we intend to manage our debt levels in a manner consistent with maintaining investment-grade quality ratios,” R&H says in the filings. The company expects to maintain a debt ratio of 50% over the next several years, up from 35% at the end of the second quarter. R&H says it will use cash to: reinvest in core businesses; build new platforms to address growing needs in health, water, energy, and other areas; make selective acquisitions that add new technology or broaden geographic presence; continue to increase dividends; and to repurchase shares. R&H announced plans last month to repurchase up to $2 billion of its common stock, including $1 billion in shares through an accelerated buyback program this quarter that will be funded by the issuance of new debt.

Summer Pickup Game

So much for the dog days of summer. This is turning out to be an extraordinary season for the industry. Three deals have eclipsed the $10-billion mark so far, and there have been a scattering of billion-dollar transactions. Sabic, Apollo Management (New York), and Access Industries (New York)—industry’s emerging heavy hitters—have recently agreed to acquire GE Plastics, Huntsman, and Lyondell, respectively, in separate deals valued at more than $10 billion each. Akzo Nobel soon could join that once-exclusive club, if it decides to press ahead with a formal bid for ICI.
Could Sabic, Apollo, Access and perhaps others have designs on creating a chemical industry Champions League this summer, with plans to keep acquiring available industry assets until no one is left on the sidelines? More seriously, one wonders what will bring an end to this activity. Will activity moderate, or will there be some industry or macro mega-event—along the lines of a default that further spooks the bond markets, or something like the late-1990s Asian currency crisis—that shuts down activity.

Three Abiquim Officials Killed in Brazil Plane Crash

Three officials of Abiquim (São Paulo), the Brazilian chemical industry association, were among those killed in yesterday’s crash of a TAM Airlines flight in São Paulo, according to a post on Abiquim’s Web site (www.abiquim.org.br). “The members of Abiquim’s board of directors, and Abiquim officials, regret to inform that Abiquim’s executive vice president Guilherme Duque Estrada de Moraes, adjunct director for regulatory affairs Marta Maria Franco Laudares de Almeida, and the technical adviser Mirtes Suda were victims of the tragedy of TAM flight JJ 3054, on the evening of July 17,” according to a statement on Abiquim’s Web site. Abiquim offered its “deepest condolences to the families of Abiquim’s representatives and to all of the victims of the tragedy.” The flight was arriving in São Paulo from Porto Alegre, Brazil when the crash occurred.

Private Equity Takes Stake

Two recent deals demonstrate how private equity continues to reshape the industry’s landscape by assembling and building leading industry franchises. CVC Capital Partners’ (London) agreement to acquire Univar for about €1.52 billion ($2.1 billion) would further increase the number of top chemical distributors under private ownership (p. 6). Apollo Management’s (New York) agreement, through its Hexion Specialty Chemicals subsidiary, to acquire Huntsman for $10.6 billion, would create a $14-billion/year global differentiated and specialty chemical giant. A sale or merger of Huntsman was inevitable because the controlling shareholders were seeking to sell. Founder and chairman Jon Huntsman had publicly stated his intent to sell his stake in the company to fund his philanthropic efforts. Private equity firm MatlinPatterson (New York), which helped Huntsman avert bankruptcy in 2002 by agreeing to swap its Huntsman bond holdings for a big equity stake in the company, had also been looking to sell its stake, according to financial sources. The deal will likely face a lengthy antitrust review due to overlap in the epoxies businesses. Apollo appears determined to close the deal, betting $425 million that it can gain antitrust approvals. Apollo has agreed to pay Huntsman $325 million if the deal does not close due to the failure to obtain regulatory clearance or financing. It also agreed to pay half of the $200 million breakup fee to Basell. The process may be lengthy but Apollo appears confident that it can live with the conditions antitrust officials in Europe and the U.S. may impose.
Such deals contribute to the blurring of the distinction between “financial” and “strategic” buyers in the chemical industry. Some private equity firms are stepping beyond a simple “buy-and-flip” strategy, building scale, extending their geographic reach, and reducing cyclical risk by acquiring specialty and differentiated businesses. Such strategies previously were associated with industry buyers.