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Lonza carve out seeks growth through M&A on road to possible IPO

July 4, 2021
Chemical Value Chain

Lonza Specialty Ingredients (LSI), the business sold today to private equity investors, will use new sources of capital to grow through mergers & acquisitions (M&A) as it heads towards a potential initial public offering (IPO) within five years.

The company, which was carved out of Swiss-headquartered Lonza, will seek M&A opportunities particularly in the microbial control sector while pursuing geographic expansion particularly in Asia, China and India where it is under represented, according to CEO Marc Doyle.

He told ICIS: “An IPO is likely within five years, probably on the Swiss market given the scale of the company. No definitive decision has been taken as yet but just as a direction that’s the thinking.”

LSI was sold to private equity groups Cinven and Bain Capital though a Swiss francs (CHF) 4.2bn (€3.8bn) enterprise value deal which was announced in February. LSI has two business units – Microbial Control Solutions and Specialty Chemical Services.

The microbial business includes biocides and preservatives for consumer and industrial markets including hygiene, wood, crop protection and anti-corrosion.

Specialty chemicals contains a mixture of product lines. Its tiny cracker at Visp, in Switzerland, is unconventional as it is configured to supply basic chemicals and performance intermediates based on technologies such as hydrocyanic acid (HCN), cyanogen chloride, acetylene, ethylene, ketene and diketene chemistry. The cracker has capacity of 25,000 tonnes/year, according to the ICIS Supply & Demand Database, making it the world’s smallest.

There are 17 manufacturing sites globally with Visp being the biggest, sitting alongside Lonza’s facilities in an industry park. Visp has 850 LSI employees out of 2,800 globally.

Doyle said: “We’ll be making our own investments in that site where the cracker – which is basically an acetylene reactor – is a source of feedstocks for specialty chemical manufacture of vitamins and composite materials.”

The division is the world’s largest supplier of vitamin B3 (niacin) and includes a composites business and contract manufacturing.

According to Doyle: “We now have the opportunity to invest all our cashflow into growth. We’re exposed to high growth markets and now have the funding to put the money behind those opportunities – that includes both internal investments and M&A, and that’s quite a change from the past.”

From the UK and US the company supplies microcides, microbial control products for wood treatment and paints and coating which are exposed to fast-growing construction markets plus hygiene, home and personal care sectors.

“There is a desire for more anti-microbials in consumer products, for more clean surfaces. There is so much happening in these markets and we will be announcing expansions. I would be disappointed if we didn’t have some exciting growth investments, new product launches and internal investments [across the company] within the first year,” said Doyle.

Rebranding of the company is timetabled for early in the fourth quarter.

SANITATION MARKETS STABILISE
The pandemic caused a huge increase in demand for sanitation products to fight coronavirus, with prices and margins soaring across parts of the chemical industry exposed to these markets.

Doyle recognises that those days are over, and that markets have already stabilised, but at a higher level than pre-pandemic.

“There is no question that there is already a return to normal, which is exactly what we expected when we were looking at this opportunity. I think the new normal will be between where we were pre-Covid and where we were last year – I think we’re all more sensitive, frankly, to bacteria, viruses and these types of risks,” he said.

The CEO believes there are a lot of opportunities to innovate in this space, to bring more anti-bacterial capabilities in more convenient ways into consumer product markets.

FINANCIAL RESULTS MUST IMPROVE
For 2020, the microbial control business achieved sales of €1.07bn, 3.6% above 2019. Specialty chemicals sales fell 11.3% to €587m.

According to Doyle: “Historically this business has been growing at 1% or so and that’s not good enough for us. We want to grow at least as fast as the markets we’re in which are growing at high single digits.”

The CEO blamed a lack of investment and different business strategy for the poor results. He gave the example of custom manufacturing which was previously focused on agriculture. Now it is aiming for new growth sectors such as energy where there is opportunity to supply battery materials to new local supply chains emerging in Europe.

LOGISTICS PROBLEMS GET WORSE
In common with many players in the chemical industry, continued strong demand growth is causing problems with supply chains.

“We expect that pressure to continue at least until the end of the year. We don’t see it abating, in fact it seems to be building. The good news is that’s a sign of the recovery in the global economy; the bad news is it creates quite some stress on our organisation, leading to inflationary pressures on us and our customers,” he said.

The CEO flagged ocean freight and trucking, especially in the US, which is quite a challenge in terms of availability of labour and costs of shipments. There is also a shortage of packaging materials, on top of raw materials supply disruption.

He said: “Anecdotally ocean freight is not trending in the right direction for us and I expect costs to continue to escalate in that area. We don’t have a force majeure in any products but we are prioritising, working closely with customers to make sure we deliver the most essential products.”

The company is trying to focus its supply chain on producing higher volume products and protecting them over its long tail of smaller, niche products.

Interview article by Will Beacham

Source: icis.com

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