Solvay Casts Off PVC Unit with Ineos Deal

07.05.2013 -

Belgium's Solvay took a first step towards casting off its PVC business by agreeing a joint venture with privately-hold Ineos, which will ultimately take full control of the unit.

The PVC business, which makes plastics used in pipes, window frames and vehicle interiors in Europe, has suffered as the financial crisis has cut building projects and new car sales. Solvay wants to exit PVC production and focus on products which earn it higher profit margins.

The joint venture with Ineos will create the world's second-biggest PVC producer behind Japan's Shin-Etsu. Solvay said on Tuesday it will sell its stake in the joint venture to Switzerland-based Ineos within four to six years.

The deal, due to be completed at the end of the year, will earn Solvay an initial €250 million ($326.4 million), and then 5.5 times average recurring core profit once it exits the venture. Based on 2012 figures, that would be just short of €1 billion in total.

Solvay will invest the money in its other businesses, like specialty polymers for the oil and gas, water and healthcare sectors, and consumer chemicals for skin and hair care products.

"We will use these new resources to speed up the growth in the part of the portfolio that we consider as growth engines," Chief Executive Jean-Pierre Clamadieu told reporters.

"This could take the form of capex, this could take the form of potential acquisitions in this area, so clearly this is a transformation of the portfolio."

Solvay shares rose to a six-year high, up as much as 7.9% to €121.05, making the stock one of the biggest gainers in the FTSEurofirst 300 index of leading European shares .

The 50-50 joint venture will benefit from common purchasing of raw materials and energy, reduced logistics costs and joint marketing in response to a European PVC market facing overcapacity and demand 30% below 2007 levels.

PVC accounted for 11% of Solvay's sales last year. Removing the European PVC activities, the recurring core profit margin would have been 170 basis points higher at 18.3%.

Solvay is also trying to sell its Latin American PVC subsidiary Indupa. It also has PVC operations in Thailand and with Sibor in Russia.

Analysts welcomed the deal and the potential sale price for the whole of the European PVC business.

"For sure it's a good deal, it is an elegant way of exiting PVC," analyst Wim Hoste at KBC Securities said.

Belgium's Solvay, traditionally a maker of PVC and soda ash, a product used for glass, bought French peer Rhodia in 2011 for €3.4 billion to benefit from its higher margin chemicals operations.

Clamadieu, the former Rhodia CEO, launched a new strategy a year later for Solvay to shift its focus to the growth divisions in order to increase recurring core profit by 50% in four years.