There was a time when ICI was a barometer for the British economy. If ICI was having a bad time, it could be assumed that times were tough throughout Britain. But not any more. Not only has ICI failed to make it into the FT’s list of the world’s top 500 companies, it does not even make the British top 75 (although its spin-off pharmaceuticals progeny, Zeneca, ranks 10th).
Announcing ICI’s results earlier this month, incoming chief operating officer Brendan O’Neill said: ‘We are not satisfied, but think where ICI’s profits would be today had we not begun the transition strategy two years ago.’
In mid-1997, ICI surprised the chemical industry by announcing that it was discarding its heavy industrial chemicals heritage and buying Unilever’s speciality chemicals business for £5bn.
This left ICI heavily in debt, although within two years, 40 businesses had been sold off, generating £3.5bn. Then, at the start of this year, delays in approval from the US Federal Trade Commission caused the £650m sale of Tioxide to DuPont and NL Industries to collapse.
Investor confidence has been rattled by the failure to sell Tioxide and other businesses. The result is that ICI’s £3.9bn market capitalisation is less than half of what it was a year ago. And with its debts now standing at £4.2bn, interest charges have wiped out half of the company’s £650m 1998 trading profit.
So was the restructuring worth it? In ICI’s annual results for 1998, new specialities business accounted for roughly two-thirds of trading profits. By contrast, its industrial chemicals division lost £41m because of a down swing in the bulk chemicals cycle.
Peter Blair, European chemical analyst at Salomon Smith Barney, believes ICI’s industrial chemicals will fall further into loss. ‘The short-term outlook for ICI is weak. But it does have speciality businesses in market-leading positions throughout the world. The key is to get rid of the commodity chemicals business.’
Looking at ICI’s former rivals in the bulk business, Shell Chemicals’ earnings fell from $903m (£554m) to $452m in 1998 despite increasing volumes. Its final quarter figures for the year recorded a loss of $37m. Falling prices and the Asia-Pacific slump were mostly to blame.
DuPont, meanwhile, which bought ICI’s polyester business, saw polyester earnings fall 12% during 1998.
‘If you look at the businesses ICI has spun off, ICI Australia [now called Orica] has done OK,’ Blair says. ‘Polyester is still loss making and the outlook for that is weak.’
O’Neill says the new ICI is a leader in many different markets, has a stronger technology base, and broader customer relationships in attractive end-use markets.
Blair, however, believes ICI is stuck in a halfway house with industrial chemicals going into a slump: ‘The prospect of getting rid of this business is poor unless a company buys it at a bargain price good enough to compensate for sitting on a loss for the next three years.’
The most worrying fact for ICI must be its stock market valuation £1bn less than it paid for the Unilever businesses two years ago. But at £3.9bn, many will say that the company, considering cashflow and earnings, is still not cheap.