DSM Nurses Projects for Material Unit That Missed Out on M&AAndrew Noel
Royal DSM NA Chief Executive Officer Feike Sijbesma, who spent $3 billion to acquire nutrition assets, now nurses solar panel and medical-implant investments to supplement a slower-growth materials unit.
Large acquisitions of hundreds of millions of euros are off the agenda and Sijbesma said he’s banking on projects in the emerging businesses division to generate 1 billion euros ($1.4 billion) in sales by 2020. DSM has considered expanding in animal health, though it’s just monitoring that area for now, he said in an interview in London yesterday.
DSM planned a two-pronged hunt for targets to bolster both its nutrition and materials divisions when embarking on an buying spree in 2010, yet spending on health supplements and ingredients absorbed the lion’s share of its budget. Managers’ biggest priority is now to integrate about 15 deals in three years that took Heerlen, Netherlands-based DSM toward enzymes, fatty acids and plastics and away from commodity chemicals.
“Materials isn’t a neglected part,” Sijbesma said. “Everyone can see we spent more on acquisitions in nutrition than materials, but if you look at the company’s sales, it’s a 50:50 split. The nutrition guys have been told to spend their time on the ground integrating acquisitions. Materials has a bit more room managerially, if I find the right acquisition.”
Like BASF SE and other European chemical makers that are redefining their boundaries to reflect competition from the Middle East, Asia and U.S., DSM’s pursuit of new offerings has been hit and miss. BASF CEO Kurt Bock said Nov. 29 he’s spreading the development-budget risk on eight to 10 areas, even though they offer very little earnings potential for the next five to 10 years, and some may be abandoned.
Three years into the development of the new materials businesses, Sijbesma shelved two of them after concluding the technologies were at least 10 years ahead of the market. Food packaging that reacted to show when contents had gone off was too costly and a personalized food venture tailoring to people’s sex, age, weight and DNA type was canned. DSM has retained patents on the products, reusing the technology elsewhere when possible, he said.
“In these two fields we abandoned, I don’t know exactly how much, but many millions has been invested in them, but that’s the way it goes,” Sijbesma said.
Three remaining projects, which include biofuel technology and biochemicals based on fermentation and enzymes, are being nursed to fruition. Margins for these businesses should be 5 percent higher than DSM’s average, according to company goals.
DSM acquired a majority in Taiwan’s AGI in 2011 in a 41 million-euro deal to add ultraviolet curable resins. That same year, it took over Shandong ICD High Performance Fibre of China for an undisclosed sum, followed by a $360 million deal for Kensey Nash in 2012 that added medical implants and materials such as sutures from proteins and synthetic polymers.
Sijbesma is tweaking production at DSM’s established materials division, exploiting new markets for its flagship Dyneema lightweight plastic used in body armor after defense spending cuts culled orders. Managers are largely refocusing on other end uses, including sportswear, chains for the oil and gas industry and reinforced Levi’s 501 jeans for bikers.
Anti-reflective coatings for solar cells is a development that will give a further boost to the business, he said. The Dutch company has also joined with Poet LLC to build a cellulosic ethanol plant fueled by agricultural waste rather than food crops, and a showcase plant is scheduled to start up in the first quarter.
“If we can get it to a billion, then I’m sure we can get it to 2 or 3 billion euros,” said Sijbesma, referring to his 2020 revenue target for emerging business areas.
DSM has said it’s exploring a sale of its merchant caprolactam operation that’s part of the polymer intermediates business. DSM is considering offers for the entire unit, including production used in-house for coatings and plastics operations, people with knowledge of the situation said Sept. 26. The CEO declined to comment.
Some smaller, underperforming parts of the materials division, which posted a 27 percent gain in third-quarter earnings, may be carved out and sold, Sijbesma said, declining to give details.
DSM would be willing to explore another tie-up with a private equity firm as a means to reduce holdings in non-strategic businesses. DSM last month announced a partnership with New York-based JLL Partners Inc. to merge its Patheon drug-ingredient business with DSM’s operation to create a $2.6 billion company. DSM’s 49 percent stake includes “all kind of options” should either party wish to exit at some point, the CEO said.
“It’s a model which we can think about replicating when it works,” Sijbesma said. “You need to find a private equity company that owns a business that fits with ours.”
Allying with state-owned Sinochem in a penicillin venture has boosted ties with China and provided additional opportunities to partner in areas that have become peripheral to DSM’s core interests, said Sijbesma.
“We are very strongly positioned in China, which provides a totally different angle than the private equity model, which is strictly value generation,” he said.