Bloomberg News

BASF's Hambrecht Seeks Steady Growth With Takeovers (Update4)

February 27, 2006

Juergen Hambrecht has sold more businesses than he's bought since taking over as head of BASF AG in May 2003, leading to a 58 percent gain in the company's stock. Now he's turning to acquisitions to keep the shares of the world's largest chemical company rising.

Hambrecht, 59, wants to spend more than $8 billion to buy Engelhard Corp., a U.S. maker of catalytic converters, and Degussa AG's construction chemicals unit. Cash flow at BASF rose to more than 5 billion euros ($6 billion) last year, providing the capital and borrowing capacity to fund the acquisitions.

Hambrecht, who's worked at Ludwigshafen, Germany-based BASF for 30 years, wants to invest the extra cash after returning more than 5 billion euros to shareholders in dividends and stock buybacks since becoming chief executive officer. The CEO now wants to move BASF into areas with consistent earnings before the chemical industry enters its next cyclical decline, analysts said.

``They're flush with cash, they've done the share buyback and dividend thing,'' Andreas Gartner, who helps manage 1.1 million BASF shares at SEB Investment-Fonds GmbH in Frankfurt, said in an interview Feb. 23. ``Let's hope they're not going on too big an adventure.''

The company reported Feb. 22 that last year's profit topped 3 billion euros, BASF's second-highest annual earnings after 2001 when results were boosted by the sale of its pharmaceuticals business.

``We plan to grow profitably and create value for our shareholders,'' Hambrecht said in an interview Feb. 22. ``Certainly the two big acquisitions are not the only ones we're working on.''

Engelhard Bid

Hambrecht made an unsolicited $4.9 billion bid for Engelhard, making his pitch directly to shareholders Jan. 9 after his Engelhard CEO Barry M. Perry rejected the offer as too low. On Feb. 6 BASF extended the $37-a-share offer a month until March 3 after less than 1 percent of the stock was tendered.

Engelhard's shares have been trading above the offer price, indicating investors won't accept BASF's bid unless it is raised. The stock is up 4.7 percent since BASF made its bid, and rose 4 cents to $40.19 at 4:02 p.m. in New York Stock Market composite trading.

Demand for Engelhard's catalytic converters may get a boost from government laws pressuring industrial plants and carmakers to reduce their output of pollutants. BASF may use Engelhard's technology to improve the catalysts it uses to carry out the majority of its chemical processes.

`Playing Catch-Up'

``Catalysts is a sector the Germans have missed,'' Gartner said. ``This is something they should have gotten into 10 or 15 years ago. They're playing catch-up.''

When BASF offered to raise its bid by $1 a share in January it asked Engelhard's management to provide details showing the company's value was higher. Hambrecht said last week that he would drop the hostile bid if the price tag went too high.

``We are disciplined,'' Hambrecht said. If an acquisition threatens to hurt growth ``we will not pursue it,'' he said.

Takeovers must contribute to earnings in the third year, according to BASF's internal guidelines for acquisitions.

Early last week, Iselin, New Jersey-based Engelhard offered to open its books to BASF and other bidders provided they sign a confidentiality agreement that would prohibit them from purchasing more stock without Engelhard's consent. BASF said it is reviewing the draft agreement.

Largest Takeover

Engelhard would be BASF's largest-ever purchase and the largest European hostile takeover of a U.S. company.

Hambrecht is in exclusive talks to buy Dusseldorf, Germany-based Degussa's construction chemicals unit in a friendly transaction that would give BASF more specialized chemicals for customers in the building industry that it already supplies with raw materials.

BASF spokesman Michael Grabicki on Feb. 21 declined to comment on the amount of the bid. German newspaper Handelsblatt, citing unidentified bankers, said earlier this month the offer was 2.8 billion euros.

``These acquisitions have to be understood as strategic investments to cushion against the next downturn in the chemical cycle,'' Lutz Grueten, a chemicals analyst at Kepler Equities in Frankfurt, said in a Feb. 14 telephone interview. ``If they get Engelhard and Degussa's construction chemicals, they will be well leveraged against a downturn.''

Credit Ratings

Shares of BASF rose 62 cents to 64.18 euros in Frankfurt. Standard & Poor's in January said BASF's more aggressive expansion strategy may eventually lead to a downgrade in the company's AA- and A-1+ debt ratings. BASF has the highest debt rating of any chemical company in the world.

Of 33 analysts that follow the company, 19 recommend buying the stock and 11 have a ``hold'' rating, according to Bloomberg data. Only three advise their clients to sell.

Hambrecht began his BASF career in polymers research and took over the paints and coatings operation in 1985. During a stint in Asia, he devised a plan for an integrated petrochemical plant in China and persuaded the company to pour $1.5 billion, BASF's single biggest investment, into the site, which makes the building blocks used to make everything from concrete mixes to shoe soles.

He prevailed even as board members grew skeptical when the Asian financial crisis of the late 1990s increased the risk of the venture. The plant, which began operating last June, is helping BASF control costs more than rivals such as Bayer AG. (BAYN)

Warming to Hambrecht

``The market has warmed to Juergen Hambrecht,'' said Paul Singer, an analyst who advises fund managers at Barclays Private Clients in London, in a Feb. 9 interview. ``Going back 10 years ago, BASF was a cyclical company and a poor relation to its major competitor in Germany, Bayer. Now the tables have turned.''

Hambrecht last year tightened the company's cooperation with Russia's OAO Gazprom by sealing a stake in a project to bring gas from Siberia to Europe.

``The Nanjing and Gazprom projects show that this is top management at work,'' said Boris Schakowski, a chemicals fund manager at Union Investment GmbH, the third-largest German investor in BASF with around 1.8 million shares. ``The chemistry is right,'' he said Feb. 3.

To contact the reporter on this story: Angela Cullen in Frankfurt at acullen8@bloomberg.net

To contact the editor responsible for this story: Christopher Elser at celser@bloomberg.net.


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