NEW ERA SEEN IN EUROPEAN PETROCHEMICALS

European petrochemical producers face more strategic alliances and increased mergers and acquisitions, as well as asset trades and spinoffs. Three factors will push European companies into a new era, said Eric Leon and Michael Bennett, consultants in Arthur D. Little's London office: Increasing globalization of petrochemical markets. Increasing technological complexity. Stricter environmental regulations and increasing environmental liability in the event of accidents.

July 29, 1991

2 min read

European petrochemical producers face more strategic alliances and increased mergers and acquisitions, as well as asset trades and spinoffs.

Three factors will push European companies into a new era, said Eric Leon and Michael Bennett, consultants in Arthur D. Little's London office:

Increasing globalization of petrochemical markets.
Increasing technological complexity.
Stricter environmental regulations and increasing environmental liability in the event of accidents.

The consultants said the traditional approach to acquisitions and mergers is constrained by a scarcity of good candidates because many of them have merged or been taken over. There are also fears of acquiring environmental liabilities and of the European Community's antitrust legislation. Leon and Bennett predict that to overcome those constraints, European petrochemical companies will engage in more asset trades, portfolio exchanges, and strategic alliances.

Swapping plants or businesses without transferring ownership of the manufacturing facilities allows a company to expand its core business while limiting cash payments, currency exposure, and major ups and downs in asset values. But, they point out, such trades are hard to arrange.

STRATEGIC ALLIANCES

There also could be more strategic alliances that differ from traditional joint ventures because assets are not necessarily shared. Key resources dedicated to the alliance are typically limited to one or two functions such as marketing, production, or research.

Examples are establishment of EVC by ICI and Enimont in 1986 and the Shell-Esso cracker at Mossmoran. Alliances are also seen in technology such as the BASF-ICI-Quatrum arrangement covering polypropylene.

More alliances like those are expected. So are alliances in which distribution and marketing resources are shared or leased as companies try to reduce costs and gain access to new markets in bulk plastics, fertilizers, and other commodity chemicals.

Bennett said, "We will also see more joint manufacturing activities, particularly in basic chemicals, in which the sheer magnitude of the cost of a new steamcracker and the need to absorb such a large output may deter all but the strongest company."

Leon and Bennett said strategic alliances are easier to set up than joint ventures, involve simpler tax and legal issues, and go together faster. In the event of failure, costs usually are lower because the arrangement is more flexible than a joint venture.

More spinoffs of petrochemical assets by European chemical companies are expected, although this approach is more common in the U.S. than in Europe.