On 14 February 2021, LANXESS announced to purchase US-based Emerald Kalama Chemical (Emerald) for an enterprise value of USD 1,075m. The company produces specialty materials for sectors such as food and beverage, personal and house care. It also produces phthalate-free plasticisers for adhesives, coatings and sealants. For instance, Emerald has a powerful position in the production of various preservatives for the food industry. Most of the activities will be grouped in LANXESS’ Consumer Protection division, widening its existing solutions portfolio in water purification, preservatives, disinfectants and active ingredients. In mid-January 2021, the company already made two small acquisitions – Theseo (a disinfection and hygiene solutions provider) and Intace (a manufacturer of specialty fungicides for the packaging industry). Both companies are located in France. The communicated phase III to realign the company structure continues.

Scope believe the impact of the Emerald acquisition on LANXESS’ business risk profile will be limited considering Emerald’s size (sales 2020E: USD 425m; EBITDA USD 90m versus our projection of an EBITDA of EUR 745m for LANXESS in 2020). However, it should positively affect LANXESS’ end-market diversification, increasing the share of non-cyclical end-markets in sales and improving the resilience and granularity of its portfolio. If the deal is executed, LANXESS will have exposure to human and animal nutrition ingredients as well as the adhesives and sealants industry.

Scope anticipates that LANXESS’ profitability (EBITDA margin) will hover around 15% from 2022 onwards. This will strongly support management’s communicated target of an EBITDA pre-margin (before exceptional costs and through-the-cycle) of 14%-18% by year-end 2021.

Following the public announcement of the transaction, which is expected to be completed in the second half of 2021 (pending regulatory approval), Scope has updated its rating case for 2021 and 2022. Scope expects Emerald to deliver a high double-digit amount to earnings per year and have trimmed the assumption for bolt-on acquisitions to EUR 100m in 2022. Based on Scope’s understanding that LANXESS continues to be fully committed to its existing rating level, Scope does not expect considerable shareholder remuneration in the foreseeable future as deleveraging is a higher priority.

The agency projects that Scope-adjusted debt (SaD)/EBITDA (the most relevant credit metric for the rating) will trending up to 2.5x in 2021 but strengthen towards 2.0x in the medium term. This is supported by the assumption of positive effects on the company’s free cash flow generation. Thanks to LANXESS’ considerable cash cushion (cash and cash equivalents amount to about EUR 1.7bn at 30 September 2020) the Emerald acquisition will be completely financed with cash.

Emerald operates in total three production sides: Kalama (USA), Rotterdam (Netherlands) and Widnes (Great Britain). Regarding the numerous acquisitions made in the past, especially the Chemtura acquisition in 2016, execution and integration risk are low.

This publication does not constitute a credit rating action. For the official credit rating action release click here. On 8 September 2020, Scope affirmed its issuer rating of BBB+/Stable on LANXESS AG.