ICI is nearing the end of a seven-year transformation from sprawling, bulk-chemicals global giant to slimmed-down specialist company. Stuart Nathan assesses the success of this restructuring.
‘World Problems. World Solutions. World Class’. The 1980s advertising campaign was intended to give the message that you knew where you were with ICI.
The company’s spread was so wide that it was seen as the bellwether of British industry: it supplied so many materials needed by other manufacturers, from the building trade to mining to the car industry, that the health of ‘UK plc’ could be divined by looking at ICI’s entrails. Its flamboyant chairman, Sir John Harvey Jones, presided over what was seen as a powerhouse, taking the products of petroleum refining in at one end and producing everything from plastics, explosives and paints to cancer drugs.
And then everything changed. Now, ICI is a fraction of its former size. Paints are the only product left from its familiar portfolio. It is focused on more modest products: perfumes, adhesives and food additives.
The changes began in 1993, with the demerger of the pharmaceuticals, agrochemicals and specialities divisions into Zeneca (now AstraZeneca, after a merger with the Swedish pharmaceut-icals company). The split was intended to sharpen both companies’ focuses on what they saw as their core competencies — a heavy chemicals operation had no business making drugs, weedkillers and pesticides. ICI would concentrate on what it was good at, accept the cyclical nature of its businesses and make money over the cycle by shrewd investment and better resource management.
This tactic didn’t last long. Four years and a change in management later, chief executive Charles Miller Smith, the first not to have been nurtured from within ICI, decided to take the company in a radically new direction. Borrowing heavily, ICI bought Unilever’s speciality chemicals operations — the very businesses that Miller Smith managed before he joined ICI. The rationale behind the £4.8bn deal was to shift the company towards high-margin businesses, producing chemicals tailored to meet specific customer needs. The only parts of the ‘old ICI’ to survive were to be paints and catalysts.
The company’s future lay in four divisions. National Starch produces speciality starch derivatives used in paper making, adhesives, and foods; Quest International produces flavours and fragrances for foods and cosmetics; Uniqema makes chemicals for formulating products such as emulsifiers and emollients; and Industrial Specialties makes surfactants, silicas and zeolites, and industrial catalysts — incorporating the remaining chemical production units from the old ICI.
The deal put ICI over £6bn in debt, a mountain which would be reduced by selling the bulk chemicals businesses to companies willing to take on cyclical operations, and by the profits generated from the new, high-margin operations.
Seven years down the line, this phase of restructuring is nearing completion, with 40 disposals bringing in £6.1bn. The main deals included the sale of the polyester polymers and intermediates and polyester films businesses to DuPont; acrylics to Belgian firm Ineos; automotive refinishes to US coatings specialist PPG; and a majority holding in the polyurethanes, titanium dioxide and cracker-based polyolefins operations to the US family-owned company Huntsman.
The last piece in the disposals jigsaw is probably the most contentious — the halochemicals business, including the chlor-alkali operations based in Runcorn, Cheshire. ICI is in discussions with Ineos for its sale, but the deal will be fraught with environmental issues stemming from its use of mercury and its production of chlorine. Analysts are wondering which company will be left with the ‘green’ liabilities.
The restructuring has also changed ICI’s financial profile. Just before demerger in 1995 it made pre-tax profits of £927m on a £10.3bn turnover. Profits fell to a low of £133m in 1998, but by last year had recovered to £503m on £8.4bn sales. Analysts expect profits to dip to around £445m this year, then return to around last year’s level in 2001.
What made the buyers of old ICI businesses sure they could turn a profit on them, when ICI saw them as a millstone? Fred Squire, consultant with KPMG Consulting, says it is a question of management quality. ‘ICI has a culture of managing safety and human resources, but has never developed a business management culture,’ he says. ‘It is focused on cutting fixed costs by reducing its number of businesses and employees, but it hasn’t run those businesses well, unlike, say, DuPont, which has a strong cost control structure.’
There are exceptions to this, he says, notably paints and polyurethanes, which have both been turned from underperformers to profit-makers.
Squire thinks ICI was wrong to believe only specialities could make it money. ‘Dow Chemical is very strong in basic chemicals and polymers and makes money. DuPont is one of the largest chemical companies in the world, is very diversified and makes money. BASF has a strong philosophy of diversity through integrated production, and makes money. ICI didn’t manage well, and its difficulties are largely of its own making.’
Squire says the UK chemical industry could become like the UK car industry — plants and jobs will still exist, but the owners won’t be British. This trend has already started: Albright & Wilson, Courtaulds and Allied Colloids have all been sold to overseas owners.
Despite its disposals, ICI is still £3bn in debt. As Squire points out, other companies have drastically reshaped without creating such a debt burden.
Laporte is a good example: it has taken the commodities-to-specialities route while making a significant acquisition on the way. The company, which has a basis in products derived from clays and other minerals, bought 114 businesses in 14 years, mainly on the commodities side, and failed to integrate any of them. Then, as with ICI, a chief executive arrived from outside the chemicals industry: Jim Leng, formerly with packaging firm Bonar & Law.
Within six months, Leng changed the entire executive team. Then the disposals began. Everything which did not fit the profile of a focused, high-margin speciality chemicals firm was sold off, building up a cash pile. In 1998, Leng unveiled his big acquisition: the speciality chemicals operation Inspec, formed some years earlier from the specialities operations of BP and Shell. Laporte’s core business would be to produce active ingredients and intermediates for the pharmaceuticals industry.
This September, the company got rid of the rest of its non-core businesses, selling all its pigments, additives, compounds, water treatment, timber treatment and electronics chemicals operations to US firm Kohlberg Kravis Roberts for £810m. The deal cut Laporte’s plants from 55 to 21, and almost halved its workforce. Profits have been rising since Leng’s arrival, from £24m in 1995 to £78m last year. Analysts predict a jump to £129m next year and £136m the year after.
The question is whether such moves merely make companies more attractive as acquisition targets for other predators. Talks between Laporte and a big chemicals company — believed to be Clariant — were recently aborted after a disagreement over valuations.
But ICI chief executive Brendan O’Neill, another import to the company (in his case from Guinness) who took over from Miller Smith last year, is optimistic. ‘We have a strong, cash-generative business here,’ he says, despite share prices hitting a 15-year low in September. He predicts that ICI’s debt will soon be wiped out by a combination of further disposals, halving the company’s dividend payouts to free up more cash, and revaluing its pension scheme.
The additional money could be earmarked for more ‘bolt-on’ acquisitions to the four core businesses, according to O’Neill. ‘In three to five years’ time, ICI could be part of something bigger,’ he says. He admits ICI could be an acquisition target, but prefers the options of joint ventures and mergers. ‘I am not waiting for the eagle to swoop down and pick me up,’ he adds.
But Squire is not so sure. Although he believes O’Neill and Miller Smith’s management style is far more customer-focused than their predecessors, he cannot see a logic to ICI’s strategy. ‘The four divisions don’t seem to have any reason to hang together,’ he says. ‘You have to ask yourself whether they would be worth more if they were split up and sold off. ICI seemed to lose touch with how to run a chemicals company back in the early 1980s and it still doesn’t know what it exists for.’
Stuart Nathan is deputy editor of The Engineer’s sister title Process Engineering