Evonik IPO to underscore its key role

Few people outside Germany or the chemical industry knew much about Evonik Industries – until it went up in flames.

A fire last month at an Evonik chemical plant in Marl, Germany, killed two workers and sparked fears of a global shortage of a key ingredient used to make the coatings of car fuel injection and braking systems.

The company is offering substitutes to customers and, so far, carmakers have been able to avoid a supply crunch.

Still, the incident underscored the unseen yet critical role played by Evonik’s speciality chemicals in global supply chains.

Already familiar to German football fans as the sponsor of Borussia Dortmund’s soccer shirts, Evonik will gain a much greater public profile if it successfully pulls off a planned initial public offering next month.

The trustees of Evonik’s majority owner, the RAG Foundation, a quasi-public entity, are set to meet on Monday and could give the green light for an IPO shortly thereafter.

CVC, the private equity group, owns the remaining 25 per cent of Evonik, which it acquired for €2.4bn in 2008.

The pricing and amount of shares to be floated will depend on market conditions but market watchers say the IPO could be one of the biggest in Germany for a decade and create a company with a chance of entering the blue-chip Dax index.

Evonik’s revenues increased last year 9 per cent to €14.5bn while earnings before interest, taxation, depreciation and amortisation rose 17 per cent to €2.8bn, or equivalent to a 19 per cent ebitda margin.

The IPO was postponed last year due to market volatility that also forced Siemens to pull the plug on a planned listing of Osram, its lighting unit.

With fears over a possible Greek exit from the eurozone again unsettling markets, a further delay is possible, although a person close to the foundation said: “The light is currently still on green.”

Political pressure to achieve a good valuation is high because the RAG Foundation was set up to help finance the social costs and long-term liabilities associated with the ending of subsidised coal mining in 2018.

“It’s a question of timing now and how are they going to get maximum value for what they believe to be one of the greats of the German chemical industry,” said Anton Ticktin, a partner with Valence, an investment bank focused on the chemicals sector.

BASF, Germany’s biggest chemical company by sales, has an enterprise value of roughly 5.2 times ebitda.

But bankers say that in terms of products, a better comparison for Evonik might be with DuPont, the US chemical company valued at about 8.7 times ebitda.

Extrapolating an enterprise value for Evonik is not straightforward, however, due to its property holdings and pension obligations and the need for a discount to attract first-time investors.

The company had €800m of net debt at the end of 2011 and expects 2012 earnings to be slightly below the previous year.

The valuation will also depend on the company’s ability to unpeel the inherent complexity of a speciality chemicals maker and convince institutional investors of its growth prospects.

Evonik makes amino acids for use in animal feeds, ingredients for pharmaceutical applications, silicas to improve the performance of tyres and high-performance polymers that make pipelines less vulnerable to pressure and corrosion.

Plexiglass, Evonik’s transparent, lightweight plastic, is a household name used in construction, lighting, car windscreens and aircraft windows.

About one-quarter of all nappies sold contain Evonik’s super-absorbents.

Evonik also has a lithium ion battery joint venture with Daimler to supply the German carmaker’s next generation of smart electric vehicles.

A focus on specialised, as opposed to commoditised chemicals, has helped Evonik raise profit margins since 2008 and industry experts say the company holds a top-three market position by sales in 80 per cent of product ranges.

Just over half of its revenues come from Europe, with Asia and the US accounting for roughly one-fifth each. Evonik plans to invest more than €6bn by 2016 and about one-third of this sum will be invested in Asia.

Evonik received a timely boost this month when its long-term corporate credit rating was upgraded one notch to BBB+ by Standard & Poor’s.

Additional reporting by Stanley Pignal