International -- European Business: BRITAIN
THE NEW ALCHEMY AT ICI (int'l edition)
Can it make its move to specialty chemicals work?
Charles Miller Smith doesn't come across as a gambler. Tall and silver-haired, he pads around the art deco London headquarters of Imperial Chemical Industries PLC in a cardigan sweater, decorously serving coffee. Yet the soft-spoken Miller Smith is taking huge risks in an effort to save the flagship British company from obsolescence.
Miller Smith, 59, believes a radical switch into specialty chemicals can change ICI's luck. The company has been a mediocre performer, whose 7.6% adjusted returns on capital employed are among the lowest in the European chemical industry, according to J.P. Morgan & Co. So far, the acquisition spree that Miller Smith launched 18 months ago hasn't boosted ICI's stock price, which has sunk by 20% during his three-year tenure. Debt is at dangerous levels, and takeover pros are eyeing the company. Yet Miller Smith is sticking to his guns. "Without the risk, there will be no reward and probably no ICI," he declares.DIVIDEND WORRIES. Few dispute that getting out of low-margin bulk chemicals into more lucrative specialty businesses is a sound strategy. But Miller Smith must convince a skeptical audience that he can pull it off in a tough environment. A little more than a year ago, he borrowed heavily to acquire the Unilever specialty businesses that he coveted for ICI's new core. Then the economy turned against him. The strong British pound and the collapse of commodity prices have hurt ICI. Profits fell by 47%, to $116 million, in the third quarter. Pretax profits were just $640 million on sales of $18.4 billion last year.
Worse, selling the units that Miller Smith wants to jettison to pay off the company's $7.3 billion in debt has gotten harder. One deal has fallen through, and regulators are holding up another. Some analysts worry that ICI might slice its dividend or even have trouble paying its bills. "It's not exactly his fault, but three years have passed, and his strategy for solving problems has not worked," says Peter Houghton, an analyst at J.P. Morgan in London.
Miller Smith says the only alternative to his course of action was a merger that might have erased ICI's venerable name. When he took the reins in 1995 after a long career at Unilever PLC, he made a careful study of the business environment with the aid of McKinsey & Co. and Goldman, Sachs & Co. The conclusion: With Britain's industrial base declining, ICI no longer had the markets or the financial heft to compete with the likes of DuPont Co. and BASF in bulk chemicals. "To put it in the starkest terms, what you had was a commodity chemical business that was subscale," says John L. Thornton, a member of the Goldman executive committee who has worked closely with Miller Smith on ICI's makeover.
Miller Smith and his advisers sized up potential acquisitions and put Unilever's specialty chemical line, which Miller Smith knew intimately, at the top of their shopping list. Unilever's brass liked these businesses, but they were outside its consumer-products core. As an auction got under way, ICI made a preemptive bid of $7.9 billion in May, 1997--near the top of the market. Bankers say the company paid a fair price, but it had to borrow $8.5 billion to finance it.
The move put some thoroughbreds into ICI's stable. One new star is a Bridgewater (N.J.)-based business deceptively named National Starch & Chemical Co. With about $2.5 billion in sales last year and nearly 15% margins, National Starch is a world leader in supplying the delicate adhesives that companies such as Intel Corp. use in assembling packages of chips. It also produces superglues that helped give Britain's supersonic Thrust car sufficient lightness and strength to break the land-speed record last year.
Miller Smith is also high on flavors and fragrances producer Quest, a $1.2 billion business whose estimated 10% margins need improvement. The company brewed up Tommy Girl perfume for Tommy Hilfiger. Both National Starch and Quest are involved in the lucrative art of creating new flavors and textures for foods. They see a big future in manipulating food ingredients so products can claim to have health benefits. For instance, specially created starches can be used to mimic fiber or to substitute for fats in baked goods.
While few dispute that these are good businesses, some observers wonder how much ICI can add to their value. For his part, Miller Smith thinks Quest can beef up its margins and eventually tap into a $1 billion new market by selling to previously off-limits Unilever competitors. James A. Kennedy, CEO of National Starch, says the business is better off under the umbrella of a chemical company. "[At Unilever] we certainly did not have the center-stage position we have at ICI," he says.IMMINENT DEAL? Right now, however, investors are more focused on the businesses that ICI can't unload than the ones it has bought. Soon after the Unilever acquisition, ICI sold off about $5 billion in businesses, including its Australian operations and its fertilizer, explosives, and polyester units. But since then, the pace has slowed. The $1.2 billion sale of the company's global pigment business to Dupont and other buyers has been delayed by U.S. antitrust regulators. Regulatory concerns also wound up shelving the agreed $455 million sale of Crosfield Chemical, a detergent-ingredients subsidiary, to W.R. Grace & Co.
Such stumbles have investors worried that ICI could be forced into selling assets cheaply to service its debt and keep its dividend up. Next year's income, according to estimates, could fall to twice debt interest cover--a dangerously low ratio in a downturn. "It is pretty simple. Some of their ratios are at levels where people usually worry about financial risk," says Terry Smith, a director at London brokerage Collins Stewart. Miller Smith insists that ICI has plenty of room to maneuver and says he is working on at least 10 potential sales. Indeed, rumors that a big deal could be imminent have pushed up ICI's stock sharply in recent days, to $9.92.
If Miller Smith is losing sleep at night, he doesn't show it. His many admirers say that he is a man who doesn't let a little adversity distract him from the big picture. Tough times are nothing new. He grew up watching his father struggle running a small textile business in his native Scotland that was eventually liquidated.
The economic headwinds may make Miller Smith even more determined. He will replace Sir Ronald Hampel as chairman at the annual meeting next April, and the board may require him to give up the CEO's chair. But he will continue to oversee strategy and is already grooming Chief Operating Officer Brendan O'Neill as his successor. O'Neill, brought in from Guinness in May, is grinding away at costs, trying to lift ICI's returns.
For example, ICI has been cutting personnel by 4% to 5% a year since the early 1990s, and Miller Smith says the trimming will continue. He has pledged $8 billion worth of sell-offs and suggests the pruning could go deeper. Some industry watchers think that ICI's $2.5 billion acrylics and polyurethane business could go. Once debt is under control, more acquisitions seem in the cards. Already this year, ICI has spent $1.1 billion for a high-tech materials supplier and a European paint business.
The new ICI is already taking shape around the Unilever businesses. Most of its managers will be outsiders, many from companies that it acquires. About half of ICI's sales this year will come from its new core. But Miller Smith has a rough patch to get through. If he makes it, a great British industrial name will survive into the next century.By Stanley Reed in LondonReturn to top