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DSM Seeks Partners to Take Over Part of Caprolactam Capacity

Royal DSM NV may take on partners for some caprolactam operations in North America and Europe as it moves away from low-margin commodity chemicals used in basic plastics, Chief Financial Officer Rolf-Dieter Schwalb said.

About two-thirds of DSM’s volume of the benzene-based chemical used in carpets and other goods is sold externally and management is “looking for ways to reduce exposure” in this area of the business, Schwalb told journalists on a call. The rest of the caprolactam produced is used internally.

“We do not talk about divestment necessarily but different ways of reducing our exposure to the merchant market,” Schwalb said. That may involve an accord “where we operate the lines and they own the assets and capacity.”

DSM’s caprolactam business suffered as demand in the automotive and construction industries decreased, and lower prices relative to the raw material benzene squeezed margins, resulting in a negative impact of 105 million euros ($134 million). DSM is looking to extend cost-cutting measures with Chief Executive Officer Feike Sijbesma today predicting that markets will remain “tough.”

Third-quarter earnings before interest, taxes, depreciation and amortization dropped 20 percent to 270 million euros, in line with analysts’ estimates. Shares of the vitamin, nutrition and high-tech plastics company gained 4.4 percent to 41.1 euros as of 1:08 p.m. in Amsterdam.

Carpet Maker

DSM has already struck an agreement with U.S. carpet maker Shaw Industries that purchased part of DSM’s caprolactam capacity for their own use and “that kind of exposure reduction could also play a role,” he said.

A joint venture to produce caprolactam in Nanjing with China Petroleum & Chemical Corp. is going ahead as the nation is an importer of the chemical. While “it makes sense” to invest in China, DSM faces a challenge in merchant caprolactam in North America and Europe, Schwalb said.

“The fact that they are looking for a way to lower the impact from caprolactam is a positive,” Fabian Smeets, an analyst at ING, said by phone. Smeets has a hold rating on DSM.

Analysts including ABN Amro’s Mutlu Gundogan have urged the disposal of materials units, which could boost DSM shares to 50 euros, Gundogan said. DSM isn’t contemplating such a move as it wouldn’t create shareholder value, Schwalb said today.

Pharma Partner

DSM is in a prolonged hunt for a partner for a custom-drug production business. It teamed up with Sinochem for an anti-infectives unit, yet finding a similar partnership for drugs has so far proved elusive because it’s harder to match interests and agree on valuations and governance. Discussions are underway, according to the CFO.

“Partnership discussions are not easy and take time,” Schwalb told reporters.

Quarterly sales fell 1 percent to 2.3 billion euros.

Sijbesma is cutting 1,000 jobs across the company’s operations. The executive had to lower a profit target for 2013 in September against the background of deteriorating economic conditions.

He’s used 2.3 billion euros in acquisitions to steer the company toward higher-margin enzymes, nutritional ingredients and specialty plastics, where demand is growing more quickly. About two-thirds of profit now stems from nutrition supplements, vitamins and animal feed.

Purchases include baby-food ingredients maker Martek Biosciences and Tortuga, a Brazilian maker of supplements for cattle. On Oct. 26, the company announced the purchase of Cargill’s cultures and enzyme business for 85 million euros.

Schwalb said the current acquisition budget stands at about 1 billion euros and there may be two to three potential purchases in the future. DSM is nearing the point where it will seek to consolidate the takeovers it’s completed, he said.

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