Covestro Cut Loose From Bayer Puts New Freedom to WorkBy
CEO Thomas says quick decision making easier after spinoff
Bayer’s Covestro stake could help get financing for Monsanto
A 20-foot giraffe made from flip-flops littering Kenyan beaches will soon take pride of place at Covestro AG’s headquarters in Leverkusen, Germany. The impulse purchase by Chief Executive Officer Patrick Thomas underscores a new freedom to maneuver and speed up decision-making following the polymer maker’s spin off from Bayer AG last year.
“We’ve made tons of decisions, ones that would have been big and complex and taken a year at Bayer that we now just get on with,” Thomas said in an interview.
Covestro’s journey as a solo company is just getting started, and the consensus estimate for profit this year “looks pretty accurate,” the CEO said. Analysts expect a 3 percent increase in 2016 earnings before interest, taxes, depreciation and amortization to 1.69 billion euros ($1.9 billion). That’s growth Bayer won’t want to miss out on, and the German drugmaker could use its remaining 64 percent stake as collateral for a bridging loan should it succeed in buying U.S. seed producer Monsanto Co., Thomas said.
While Bayer has pledged to whittle down its Covestro holding over the medium term, that’s not distracted Thomas from taking advantage of the company’s newly won freedom. The CEO has signed off on a wide range of decisions including a new IT system and the closure of an aging plant in Brazil.
Bayer had previously wanted to shutter the sub-scale factory, but had deemed the move too risky given the potential for labor unrest at an adjacent crop-chemical plant, Thomas said. Covestro is also installing a simpler and cheaper IT system that’s more in step with the company’s portfolio of products that include polyurethane foams for car parts and polycarbonate for laptop cases, rather than a drugmaker managing thousands of over-the-counter pharmaceuticals. IT costs should fall to about 1 percent of sales, compared with a typical 5 percent to 7 percent at a health-care company, the CEO said.
Covestro is on track to meet a goal for 420 million euros in annual cost cuts. The current savings target is just the beginning, Thomas said, declining to give further detail.
“We’re on track with the current savings target, but there are new things in the pipeline,” said the former executive at Imperial Chemical Industries and Huntsman Corp. “We have to deliver on the 420 million euros first.”
Covestro will expand its coatings additives business. Evonik Industries AG stepped up its competition in that market this year with the purchase of Air Products & Chemicals Inc.’s division for $3.8 billion. Thomas said he looked at the business “out of interest,” but the asset went for a price that Covestro wouldn’t have been prepared to pay. Instead, Covestro plans a myriad of smaller bolt-ons to add active ingredients and expand into a broader array of end markets beyond the automotive industry. One new area is combining polycarbonates with carbon fiber for use in laptop cases.
Covestro shares are up 22 percent this year, prior to today, valuing the company at more than 8.3 billion euros. The stock gained 0.3 percent to 41.13 euros as of 12:26 p.m. in Frankfurt on Tuesday. The chemicals industry was upgraded to neutral from underweight by UBS this week.
“We are in an unusual situation,” Thomas said. “Our previous owner is happy with the share price, and if shares heat up, it’s a nice problem for Bayer to have.”
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