The New Alchemy At Ici

Can it make its move to specialty chemicals work?

Charles Miller Smith doesn't come across as a gambler. Tall and silver-haired, he pads around the art deco London headquarters of Imperial Chemical Industries PLC in a cardigan sweater, decorously serving coffee. Yet the soft-spoken Miller Smith is taking huge risks in an effort to save the flagship British company from obsolescence.

Miller Smith, 59, believes a radical switch into specialty chemicals can change ICI's luck. The company has been a mediocre performer. Its 7.6% adjusted returns on capital employed are among the lowest in Europe's chemical industry, according to J.P. Morgan & Co. So far, the acquisition spree that Miller Smith launched 18 months ago hasn't boosted ICI's stock, which has sunk by 20% during his three-year tenure. Debt is at dangerous levels, and takeover pros are eyeing the company. Yet Miller Smith is sticking to his guns. "Without the risk, there will be no reward and probably no ICI," he declares.

Few dispute that getting out of bulk chemicals into more lucrative specialty businesses is a sound strategy. But Miller Smith must prove that he can pull it off in a tough environment. Just over a year ago, he borrowed heavily to acquire the Unilever specialty businesses that he coveted for ICI's new core. Then the economy turned against him. The strong British pound and the fall of commodity prices have hurt. Profits fell by 47%, to $116 million, in the third quarter. Pretax profits were just $640 million on sales of $18.4 billion last year.

Miller Smith says the only alternative to his course of action was a merger that might have erased ICI's venerable name. When he took the reins in 1995 after years at Unilever PLC, he carefully studied the business. The conclusion: ICI no longer had the markets or the financial heft to compete with the giants in bulk chemicals. Miller Smith sized up potential acquisitions and put Unilever's specialty chemical line at the top of his list. Unilever's brass liked these businesses, but they were outside its consumer-products focus. As an auction got under way, ICI made a preemptive bid of $7.9 billion in May, 1997. Bankers say the company paid a fair price, but it had to borrow $8.5 billion to finance it.

The move put some thoroughbreds into ICI's stable. One new star is a Bridgewater (N.J.)-based business named National Starch & Chemical Co. With about $2.5 billion in sales last year and nearly 15% margins, National Starch is a leader in supplying the adhesives that companies such as Intel Corp. use in assembling packages of chips. Miller Smith is also high on $1.2 billion flavors and fragrances producer Quest. Both National Starch and Quest are involved in the lucrative art of creating new flavors and textures for foods.

HEADWINDS. Right now, however, investors are more focused on businesses that ICI can't unload. Soon after the Unilever deal, ICI sold off about $5 billion in businesses. On Nov. 26, it announced the sale of its Teesside Utilities energy and services unit to Enron Corp. for $497 million. But the $1.2 billion sale of ICI's pigment business to DuPont and other buyers has been delayed by U.S. regulators. Regulatory concerns also shelved the agreed $455 million sale of Crosfield Chemical to W.R. Grace & Co.

The economic headwinds may make Miller Smith even more determined. He will replace Sir Ronald Hampel as chairman next April, and he may have to give up the CEO's chair. But he will still oversee strategy and is grooming Chief Operating Officer Brendan O'Neill as his successor. O'Neill is grinding away at costs. ICI has been cutting personnel by up to 5% a year, and Miller Smith says the trimming will continue. Once debt is under control, more purchases seem likely. This year, ICI has spent $1.1 billion for a high-tech materials supplier and a paint business.

The new ICI is taking shape around the Unilever businesses. Most of its managers will be outsiders, many from companies that it acquires. About half of ICI's sales this year will come from its new core. But Miller Smith has a rough patch to get through. If he makes it, a great British industrial name will survive into the next century.