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INSIGHT: Borealis’ ambitions to become major fertilizers player end up in divestment
Author: Jonathan Lopez
2022/02/04
MADRID (ICIS)--Back in 2014, Borealis’ CEO was eager to tell of the company’s ambitious plans to build a pan-European fertilizers production “corridor” which, by linking assets from the Black Sea to the Atlantic, would become a major player in the industry.
Eight years and three CEOs later, the fertilizers division – including production of by-product melamine – has just been sold for a modest €455m after writing down aged assets across Europe and with Borealis’ now-majority owner, Austria’s energy major OMV, taking an impairment loss of €444m.
EuroChem, already one of the largest fertilizers players in Europe, expects to close the acquisition of the Borealis assets by the third quarter of this year.
Both companies are confident the EU’s competition authorities will not raise any objections, despite some sources in the market wondering whether EuroChem will, effectively, become “too big”.
Under the terms of the deal, EuroChem is to acquire assets in Linz, Austria, producing fertilizers as well as melamine; in Piesteritz, Germany, producing melamine; and in Ottmarsheim, Grandpuits, and Grand Quevilly in France, producing several fertilizers.
The fertilizers division at Borealis stands for 15-20% of total sales. Borealis’ financials are now reported under OMV’s.
In 2020, the last year it reported financials as a standalone company, sales stood at €6.8bn, down from €8.1bn in 2019 as the pandemic took its toll.
Melamine players in Europe showed some concern about the size of EuroChem post-transaction, in a market set to be led by players from east Europe. Russia’s Metafrax has also announced melamine expansions.
Melamine is used in the production of thermosetting resins for laminates, protective coatings, moulding compounds, textile finishes, and paper coatings, and has other end uses.
“I am quite surprised as EuroChem will become very powerful in Europe,” said a source in the melamine market.
“Maybe too powerful.”
A distribution source concurred and described the move as “worrying”.
GRAND PLANS THWARTED
“In fertilizers, we are trying to draw a line south and north of the rivers Seine, Rhine and Danube. We are aiming to work on that corridor using the river ways and with the plants we have next to those rivers to allow supply to the whole continent.”
The quote belongs to Borealis’ CEO in 2014, Mark Garrett. In in an interview at the time with ICIS, he was keen to focus on the company’s expansion plans in fertilizers, despite polymers constituting its core business.
Borealis was then owned by the Abu Dhabi investment fund Mubadala, at the time called International Petroleum Investment Company (IPIC), which held a 64% stake.
Mubadala was always an investor that would not get too deep into the day-to-day running of Borealis, according to the producers’ own executives on several occasions.
But when OMV took the lead in Borealis’ capital structure, it became clear that it was to make Borealis its petrochemicals division – although, for now, the name and structure of Borealis as standalone company have been kept.
This week, Borealis’ CFO Mark Tonkens summarised the past eight years: “You have to remember at that time we said we would need to increase production from 4m [tonnes/year of fertilizers] to somewhere around 10m [tonnes/year].
“We had that ambition, but it didn’t materialise, and we had to admit we wouldn’t be able to have the full competitive advantage compared with other players, and decided we would sell,” the CFO added.
It may not have helped that Borealis’ fertilizers assets, often described by company executives as “state-of-the-art”, kept running into operational problems often, several sources have recurrently told ICIS.
Borealis’ fertilizers assets, due to their ageing conditions and despite their geographical reach around Europe, had become some sort of giant with feet of clay.
EuroChem, with most of its operations in Russia but headquartered in Switzerland, did not make any executive available for comment after the transaction was announced.
A spokesperson for the major fertilizers producer, however, told ICIS: “We invest in all of our global facilities, as all EuroChem assets are subject to regular performance appraisals. Should the deal go through, the Borealis network won’t be an exception to that,” the spokesperson said.
While the Borealis CFO and its CEO, Thomas Gangl, said this week they were very satisfied with the deal, the price the assets fetched stood below some expectations.
In mid-2021, news agency Reuters reported Borealis could cash in €500-600m for the assets, so the price agreed now at €455m stands well below the low range.
Before that, when Borealis carved out its fertilizers division with view to a divestment in 2018, some analysts said the assets could have fetched at the time a selling price of €1.0bn.
“We didn’t just call EuroChem. We started a process in February 2021, and we have had contacts with several companies in a very competitive process. We are happy with this transaction and the selling price is a fair value,” said the Borealis CEO.
“We are now focusing on investing in areas of transformation for our polyolefins business and the required transformation to adapt to the circular economy.
“We will now sharply reduce our CO2 [carbon dioxide] emissions: the fertilizers division accounted for more than half of them.”
Insight article by Jonathan Lopez
Additional reporting by Melissa Hurley
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