On 30 May 2022, LANXESS said it will set up a joint venture with Advent International. The newly formed entity will acquire DSM’s engineering materials division for a purchase price of roughly EUR 3.7bn. The deal is the latest in series of important transactions in the global polymer industry (see: Sale of DuPont Mobility & Materials segment to Celanese a blueprint for similar transactions in Europe). The new JV is financing the purchase with equity from Advent and external debt. LANXESS will transfer its High Performance Materials business unit (segment: Engineering Materials) into the JV with Advent. The new entity will generate yearly sales and EBITDA of roughly EUR 3.0bn and EUR 500m respectively.

LANXESS will hold up to a 40% share of the joint venture, receiving a payment of at least EUR 1.1bn in 2023 mostly earmarked for deleveraging after its two larger acquisitions initiated in 2021 (see: LANXESS: Acquisition of Microbial Control business unit of International Flavors & Fragrances; LANXESS: Acquisition of Emerald Kalama Chemical). In line with the company’s conservative financial policy, including balancing the interests of shareholders and creditors, up to EUR 300m of the payment is due to be spent on a share buyback program planned in 2023. From 31 March 2022, LANXESS will disclose results of High Performance Materials business line as discontinued operations and income form at equity after the closing of the transaction. The deal should be completed in the first half 2023 pending anti-trust approvals. Execution risk is limited considering LANXESS’s numerous acquisitions and divestments in the past year.

The transfer of the High Performance Materials business line to the new JV will have a limited impact on LANXESS’s business risk profile. The resilience of the company’s remaining portfolio and stability of profitability (EBITDA margin) should improve. Additionally, whereas the cyclical automobile industry will account for a smaller proportion of group sales, decreasing to roughly 10% from 20%, LANXESS’s business will have a narrower scope and less diversity after the separation of the High Performance Materials unit.

From a financial perspective, the deal supports LANXESS’ credit profile in 2023 as most of the proceeds are earmarked for deleveraging. Our understanding is that M&A is not on the agenda for 2022 and 2023. In the view of the acquisition of Emerald Kalama Chemical and IFF’s Microbial Control business, LANXESS credit metrics deteriorated in 2021. Leverage, measured by SaD/EBITDA, stood at 3.0x and expected to remain on that level in 2022. Following the transaction, we expect the ratio to strengthen towards 2.1x in 2023. Besides the planned share-buyback program, our key rating assumption include: i) LANXESS guidance for EBITDA before exceptional items significantly over EUR 1,010m achieved in 2021, based on the assumption of management’s ability to pass through higher raw material and energy prices to customers; ii) various impacts of the deconsolidation of the high-performance materials business line. LANXESS has the option to monetise its remaining stake in the JV in 2026 which could raise further funds for deleveraging or external growth opportunities, especially for expanding its consumer-protection business.

This monitoring note does not constitute a rating action, nor does it indicate the likelihood of a credit rating action in the short term. The latest information on the credit ratings in this monitoring note along with the associated rating history can be found on www.scoperatings.com.

For the official credit rating action release click here. On 4 August 2021, Scope affirmed its issuer rating of BBB+/Stable on LANXESS AG.