COLOGNE, Germany—Arlanxeo's tenure as a joint venture didn't last very long.
A little more than two years after its establishment, Laxness A.G. is selling its remaining 50 percent stake in the synthetic rubber company to partner Saudi Arabian Oil Co., which currently holds an equal share.
The two companies signed the agreement on Aug. 8. The venture is valued at about $3.47 billion with sales of about $3.7 billion in 2017. Lanxess said it will receive $1.62 billion from the transaction and use the proceeds to strengthen its financial basis and reduce its net debt.
The transaction is subject to approval of the relevant antitrust authorities. At the same time, information or consultation of the relevant employee representative bodies will take place. The parties expect to complete the transaction by the end of 2018.
Lanxess CEO Matthias Zachert said in an email that there are several reasons why the firm decided to sell its stake in Arlanxeo, namely to insulate its portfolio from cyclical markets.
"Without the rather volatile rubber business, we would be able to increase the resilience of our business," he said. "With the proceeds from the transaction, we would be able to strengthen our financial basis and gain additional strategic flexibility for further growth. All in all, we would complete another important milestone of our strategic transformation earlier than originally planned. This should allow us to better focus on our strategy to become a leading player in mid-sized specialty chemicals markets."
Saudi Aramco, as Saudi Arabian Oil is known, said in a statement that taking full ownership of Arlanxeo will diversify the firm's downstream portfolio and strengthen its capabilities across the entire petroleum value chain. The acquisition, when completed, also is key to Aramco's strategy to become the world's foremost integrated energy and chemicals company, according to Abdulaziz Al-Judaimi, the firm's senior vice president of downstream.
"The acquisition will accelerate our growth into C4-based chemicals, including butadiene and isobutylene," he said in a statement.
Arlanxeo would maintain its current headquarters in Maastricht, Netherlands, and enhance Aramco's sustainability efforts to optimize tire performance-related fuel consumption. The firm said this would complement its strategy to focus on increasing gas mileage efficiency and reduce engine emissions. Aramco added that this is aligned with its downstream strategy to "drive value across the hydrocarbon chain by expanding and integrating its portfolio and partnerships, and creating additional revenue streams."
Debt a key driver
Lanxess' debt has been a driving force behind a number of strategic realignment moves since Zachert took over in April 2014. The firm's initial restructuring move, "Let's Lanxess Again," resulted in more than 1,000 layoffs, a realignment of its EPDM and neodymium-based performance butadiene rubber production—affecting about 140 employees worldwide—and culminated with the formation of Arlanxeo, of which about $446 million was used to reduce its net debt.
The moves resulted in Lanxess' debt decreasing to $1.4 billion in 2015 compared to $2 billion at the end of 2013.
"One of our top priorities in 2014 was to restore Lanxess' stability," Zachert said. "We were then able to quickly turn to the more attractive tasks of strategically realigning the company. We were able to get back onto a growth track. Over the past few years, we have followed this path continuously and step by step. I am proud to say that everyone at Lanxess—from shift workers all the way to the board of management—have all pulled together in the same direction. We have proved that, with great discipline and commitment, we are capable of the very best performance with the result that Lanxess is now a healthy company that is well-equipped for the future."
Since 2015, however, Lanxess has gradually been shifting away from rubber and focusing on mid-sized specialty chemicals markets through a variety of deals under Zachert's tenure. The most notable came in 2017, when it acquired Chemtura—one of the world's leading suppliers of flame retardant and lubricant additives—for about $2.57 billion. It also paid about $230 million to acquire Chemours Co.'s Clean and Disinfect business, which closed in August 2016.
While deals like Chemtura have realigned the firm's portfolio, they've also driven Lanxess' debt back to its pre-2014 levels. After 2016, Lanxess reported its debt increased 97.7 percent to $2.77 billion—higher than what Zachert originally inherited.
The firm reported net debt at $3.05 billion for the first six months of 2018, up 16.9 percent compared to the end of 2017. Zachert said Lanxess will use the proceeds from its Arlanxeo stake to further increase its financial stability, including deleveraging. Specific decisions of how to allocate the incoming capital have not been made yet.
Financially, sales have increased 14.4 percent to $4.22 billion compared to the first half of 2017. Lanxess reported $11.2 billion in sales for 2017 and employs 19,200 in 25 countries with 74 production sites.
Shifting from rubber
Lanxess' deals, especially Chemtura, have significantly shifted Lanxess' portfolio away from rubber and deeper into the specialty chemicals and additives markets.
"The rubber markets still have a tendency toward volatility," Zachert said. "After our realignment we have announced our clear strategy of becoming a more profitable and a stable, less cyclical specialty chemicals company. We therefore focus on high-margin specialty chemicals to become a leading player in the respective markets."
He added that the firm has set new medium-term financial targets because of its transformation. From 2021, the firm forecasts its operating margin—measured in terms of EBITDA pre-exceptionals—to be between 14 and 18 percent. Lanxess' operating margin jumped to 13.3 percent in 2017, up from 12.9 percent in 2016.
The Chemtura deal brought about a realignment of Lanxess' additives business, combining its Rhein Chemie and Additives business units into a new Specialty Additives segment valued at about $2.14 billion with 2,900 global employees.
The firm also gained a urethanes presence, which was set aside as its own Urethane Systems unit and joined Lanxess' existing High Performance Materials unit to form a new business segment: Engineering Materials.
Lanxess had carved out and contributed its synthetic rubber business—the Tire & Specialty Rubbers and High Performance Elastomers business units—to Arlanxeo when it formed the 50-50 venture with Aramco in 2016.
At the time, Arlanxeo was valued at about $3.1 billion and Lanxess received $1.34 billion from Aramco for its initial share. The venture consists of 20 production facilities in nine countries across Europe, Asia and the Americas with about 3,800 employees and additional support staff.
The Tire & Specialty Rubbers unit produces butyl rubber, solution SBR, neodymium-polybutadiene and emulsion SBR. The High Performance Elastomers unit produces EPDM, chloroprene rubber, ethylene-vinyl acetate rubber, hydrogenated nitrile rubber and nitrile butadiene rubber.
Arlanxeo produces high performance rubbers used in the production of tires, hoses, belts and seals serving the automotive, construction, and oil and gas industries.
Despite divesting its synthetic rubber business, Lanxess said it will maintain a strong presence within the rubber and plastics industries. It will continue to offer engineering and high performance plastics as well as urethanes through its Engineering Materials segment.
It still has a strong specialty chemicals presence, namely additives, used in numerous applications throughout rubber and plastics manufacturing. This includes polymer-bound additives, release agents, processing promoters and solvent dyes for the coloration of plastics, among others.
The firm also produces various intermediate products for applications such as tires or technical rubber products.
But Lanxess has changed significantly in the past four years, and Zachert intends to continue targeting less cyclical markets to further diversify the company's portfolio.
"We will further be balancing our regional set-up, thus also reducing effects of market volatilities," Zachert said. "This includes an increased share of sales in growth markets such as Asia and North America. Moreover, we will be expanding our presence in attractive and diversified customer industries with innovative product applications. To sum it up: In the coming years, we intend to reach our full potential and transform Lanxess into an even stronger company with a highly balanced and stable platform and increased profitability."