Lanxess, Aramco establish rubber joint venture

COLOGNE, Germany—Lanxess A.G. and Saudi Arabian Oil Co. have signed an agreement to establish a joint venture for synthetic rubber.

According to a Lanxess news release, the specialty chemicals company and Aramco Overseas Co., a Saudi Aramco subsidiary, each will hold 50 percent interest in the joint venture—comprised of Lanxess' synthetic rubber business.

Lanxess said Aramco Overseas will pay about $1.34 billion for its 50 percent stake and valued the joint venture at about $3.1 billion.

The move requires approval of the relevant antitrust authorities and is expected to be completed in the first half of 2016.

“This (joint venture) will enable us to give future perspectives,” Lanxess CEO Matthias Zachert said in a statement. “Together in the future we can produce synthetic rubber in an integrated value chain from the oil field to the end product, thus establishing one of the best positioned suppliers in the world market. In this way, we will be able to offer our customers even greater reliability than before.”

A holding company headquartered in the Netherlands will manage the joint venture. Lanxess will appoint the CEO, and Aramco Overseas will name the chief financial officer. Each company will have equal representation on the venture's board of directors, and Lanxess will consolidate the joint venture's financials.

Under the agreement, Saudi Aramco will provide the joint venture with competitive and reliable access to strategic raw materials over the medium term, Lanxess said in its release.

A Lanxess spokesman said in an e-mail that creating the joint venture will allow Lanxess to set up a common integrated and competitive value chain over time to help alleviate competitive pressure in oversupplied markets. The process of integration will take several years, and Lanxess does not envision savings to become visible before 2019.

The joint venture will help Lanxess weather market challenges, the spokes-man said. However, he reiterated that the firm expects a challenging market environment because of global oversupply in synthetic rubber for the next two to three years.

“We see the transaction announced now as a very important step toward a further transformation of Lanxess,” the spokesman said. “Our rubber business will be strengthened by a strong partner, and Lanxess itself can accelerate its focus on growth in our segments Advanced Intermediates and Performance Chemicals.”

Lanxess will contribute its Tire & Specialty Rubbers and High Performance Elastomers business units, which consist of 20 production facilities in nine countries across Europe, Asia and the Americas, about 3,700 employees and additional support staff.

Lanxess employs about 16,300 in 29 countries with 52 production sites worldwide.

The Tire & Specialty Rubbers unit produces butyl rubber, solution styrene-butadiene rubber, neodymium-polybutadiene and emulsion-styrol butadiene rubber. The High Performance Elastomers unit produces EPDM, chloroprene rubber, ethylene-vinyl acetate rubber, hydrogenated nitrile rubber and nitrile butadiene rubber.

The two units are part of Lanxess' largest business segment, Performance Polymers, which also consists of the High Performance Materials (Bond-Laminates) unit.

According to Saudi Aramco's news release, the Lanxess units reported about $3.35 billion in sales and consist of four global research centers. Lanxess as a whole reported 2014 sales of about $9.6 billion.

The two units produce high-performance rubbers used in the production of tires and technical applications such as hoses, belts and seals serving the automotive, construction, oil and gas, and tire industries.

“This is yet another major step forward in Saudi Aramco's globally integrated downstream expansion strategy,” Amin H. Nasser, president and CEO of Saudi Aramco, said in a statement. “It will further enhance our competitive position in integrating our diverse portfolio.

Partnering with a world-class company like Lanxess will help scale up our global presence, and in turn create more opportunities for sustainable growth in Saudi Arabia and in markets around the world.”

Moody's, one of the world's largest credit rating agencies, gave the joint venture a credit-positive rating for Lanxess.

Francois Lauras, Moody's vice president and senior credit officer, said he believes the move will allow Lanxess to cut debt while building liquidity reserves to fund future investments and withstand potential cyclical pressure.

Moody's said Lanxess will reduce exposure to the synthetic rubber business, which remains challenged because of significant oversupply from recent capacity additions in Asia.

Longer term, the alliance with Saudi Aramco should help strengthen the competitive position of the business, the rating firm's report added.

“As contracts with current suppliers run out over the next few years, the joint venture will gradually be able to source feedstock from Saudi Aramco on favorable terms,” Moody's said.

“This access to key raw materials will improve the cost position of the joint venture and the predictability of its cash flow, which has historically been affected by the volatility of feedstock costs, such as butadiene.”

The joint venture marks the third and final stage of Lanxess' three-phased realignment program, “Let's Lanxess Again,” which was implemented in August 2014.

“We have established a completely new strategic starting point for our company in just over a year,” Zachert said.

The firm said it plans to use about $446 million of the proceeds from its transaction with Aramco to invest in the growth of its Advanced Intermediates and Performance Chemicals segments, which Lanxess said are well positioned and less cyclical.

Lanxess' Performance Chemicals segment includes the Rhein Chemie Additives, Inorganic Pigments, Ion Exchange Resins, and Leather and Material Protection Products units. Advanced Intermediates includes the Advanced Industrial Intermediates and Saltigo units.

Lanxess said it will use another $446 million for further reduction of its financial debt position with another $223 million planned to be used for a share buyback program.

The company's realignment consisted of three phases—business and administration structure competitiveness; operations competitiveness; and portfolio competitiveness—the first of which resulted in about 1,000 layoffs to its work force and the restructuring to 10 business units from 14. Lanxess confirmed in its first quarter results that this phase is complete.

The second phase involved the restructuring of its EPDM and neodymium-based performance butadiene rubber production, affecting about 140 employees worldwide. The firm will halt EPDM rubber production at its facility in Marl, Germany, and will realign its EPDM and Nd-PBR production to four strategic regional facilities with one each in North America, South America, Europe and Asia/China.

Lanxess said the Marl facility will be shuttered in the first quarter of 2016 and, after five months of negotiating, has reached a reconciliation and social plan with the 118 employees at the site. The Marl site produces synthetic EPDM for a wide rage of applications, with automotive and construction the two biggest end markets.

During the presentation of its 2014 financials, Lanxess said production from Marl will be transferred to its facilities in Changzhou, China; and Geleen, Netherlands, to limit the loss of sales.

The firm said during its 2014 financials presentation that it anticipates exceptional charges of about $58.7 million associated with the reorganization of its EPDM and Nd-PBR production network along with annual savings of about $21.3 million from the end of 2016.

Lanxess is seeing results from these moves as net income for the second quarter increased by 58.2 percent to about $94.7 million. The firm cited operational development and proceeds from the sale of noncurrent assets as reasons for the increase.

“Not only have we streamlined our administrative functions and already made many of our production structures and processes more efficient, but with this joint venture in the rubber business we are delivering on the most important phase of our realignment, with the best partner possible in a very short period of time,” Zachert said. “The resulting financial headroom will allow us to return to growth sooner than expected.”

Shahrzad Pourriahi, European Rubber Journal, contributed to this report.