Evonik Risks Muted Stock Debut as Overhang Trumps Margins

Evonik Industries AG, a German chemical maker with a higher profitability than rivals BASF SE and Solvay SA, risks losing out in the competition for investors when it lists shares tomorrow.

Any gain in Evonik’s share price in Frankfurt trading will be an opportunity for owners CVC Capital Partners and RAG-Stiftung to sell more of their stakes, putting off potential investors, said MM Warburg analyst Oliver Schwarz. Evonik will list a 12 percent stake already sold plus as many as 10.7 million shares at 32.20 euros apiece, it said today. That values Evonik at about 15 billion euros (19.5 billion) though with only 14.3 percent of shares trading freely.

“I can’t currently recommend Evonik as an investment, tell people to buy it and say that its share price will rise,” said Schwarz, who is holding off publishing research on the Essen, Germany-based company. “You have a huge share overhang. It has nothing to do with business performance.”

Chief Executive Officer Klaus Engel has boosted Evonik’s profitability more than 5 percentage points in five years, focusing the company on higher-margin specialty chemicals and new technologies such as battery cells for electric cars and fiber membranes to make biogas. The company spends a higher percentage of sales on research and development than German peers BASF, Lanxess AG and Belgium’s Solvay.

No Lock-Ups

Still, share price prospects look dim compared with Brenntag AG, a German chemical merchant whose value has more than doubled in the three years it’s been listed. Although Brenntag’s value dropped each time owners BC Partners sold an additional stake, investors benefited from lock-up periods where owners agree not to sell any shares for a certain period.

No such guarantee has been offered by RAG and CVC for Evonik. After conducting roadshows for prior IPO attempts, they secured investors from Singapore to the U.K. for the private transactions that occurred in February and March.

Today Deutsche Bank AG and MainFirst Bank AG, who are managing the sale, are placing as many as 9.32 million shares plus an over-allotment option of as many as 1.398 million shares with institutional investors, Deutsche Bank said in a statement. The bank may undertake measures to support the market price of the shares when listed, it said.

Temasek Holdings Pte, Singapore’s state-owned investment company, agreed to buy 4.6 percent of the shares to be listed. The sale to institutional investors valued Evonik at 14 billion euros, a person familiar with the matter said last month.

The listing achieves a long-held ambition, while avoiding the traumas of the past when three prior attempts for an initial public offering failed, Engel said in March. Each time, the company struggled to find a consensus between the owners’ valuation and what the market was willing to pay, he said.

Limited Free Float

While succeeding in taking Evonik public, Engel’s formula for listing the company will limit the free float to an initial 14 percent. The company has said that level could rise to as much as 75 percent later on, creating a distraction for investors that may have been attracted by Evonik’s margins.

Excluding non-chemical operations, Evonik posted earnings before interest, tax, depreciation and amortization equal to 21 percent of sales last year, beating BASF’s 13 percent margin. Solvay and Lanxess also failed to match Evonik’s profitability with 2012 margins of 16 percent and 14 percent respectively.

Evonik is benefiting from demand for its amino acids, originally intended for treatment of nutritional disorders after World War II, and now used in animal feed. Changing eating habits in Asia are boosting meat consumption and thus demand for fodder.

BASF Rivalry

Evonik competes with BASF in chemicals used to make plastics, amines, pharmaceuticals, flavors and fragrances. Both make additives for paints and coatings as well as superabsorbants for diapers and ingredients for cosmetics.

Like BASF, Evonik has exited commodities and is expanding into chemicals that go into consumer goods and health products. Engel sold a unit making carbon black used in tires after oversupply and cost-cutting at tiremakers squeezed margins. BASF has divested part of its fertilizer operations and transferred styrene plastics operations into a joint venture.

“As a European company, it is sensible to move down the value chain,” said Ulle Woerner, an analyst at Landesbank Baden-Wuerttemberg, who used to cover the company when it was listed as Degussa. “Degussa, or rather Evonik, have always had such a strategy. They have exited bits that didn’t fit. They were busy for years with divestitures and some acquisitions.”

Evonik’s roots go back to 1843, when Friedrich Ernst Roessler rented a precious-metal separating factory from the Frankfurt senate to run his own business. In 1873, Roessler’s sons converted the business into a stock company, which became Degussa, to recycle the old Gulden and Taler coins of the smaller German states for use in the new currency, the Mark.

Borussia Dortmund Deal

In 2007, the RAG foundation was established to steer the development of chemical, energy and real-estate assets and the chemical activities were given the name of Evonik Industries. RAG-Stiftung sold a 25.1 percent stake in Evonik to CVC in 2008.

In a 10 million-euro-a-year deal, Evonik boosted recognition of its new name worldwide by sponsoring soccer club Borussia Dortmund, which plays in Germany’s top league and will face Real Madrid tonight in this season’s Champions League semifinals. The company is also well-known to investors after multiple IPO roadshows.

Investors should probably wait before they buy shares, said MM Warburg’s Schwarz.

“It’ll be interesting in two or three years when the RAG has sold the stake they want to and the big investors that were there at the beginning have either sold their stakes for a certain profit or kept it and are happy with it,” he said. “Then there will be a normal market.”

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