ICI pays a price for tempting the fates

IN 1980, ICI cut its dividend. It was a symbolic act which heralded an impending recession. A stunned stock market reacted accordingly, and sold. Nearly two decades later, British manufacturing no longer looms large in the economy, nor is ICI considered a symbol of its health.

Under the leadership of Charles Miller Smith, 59, ICI aims to become a specialist chemicals group, producing fragrances, flavourings, food additives and coatings rather than ethylene, polyester and fertiliser.

Unfortunately, ICI shares have halved in value in the past year and the City again fears that ICI might have to cut its dividend.

Last week, Mr Miller Smith's strategy was called into question when the sale of Crosfield, the detergents company, fell through. The shares shed 10 per cent on Thursday to below pounds 5 from a May peak of pounds 12.44.

In theory, this strategy should create a stronger company by jettisoning the heavily cyclical bulk chemicals business and acquiring higher-margin and more stable speciality chemicals companies - similar to the Swiss groups Clariant and Ciba Specialty Chemicals.

In practice, this has meant a vast restructuring of ICI and a heavy programme of deal making dependent upon favourable markets. This high-risk strategy is coming unstuck; buying is proving easier than selling.

In 1997, ICI paid pounds 4.7bn to Unilever for its speciality chemicals companies, Quest and National Starch. A fortnight ago, Mr Miller Smith expressed his delight with the purchase; he expected both companies to grow healthily and show double-digit margins, even in a downturn.

The purchase left ICI with a record loan and massive debts. It cut them by pounds 3bn last year, selling a stake in ICI Australia and its businesses in polyester, explosives, forest products and UK fertiliser.

Mr Miller Smith stated that a further pounds 3bn could be raised despite falling stock markets and declining profits. Yet few analysts were convinced.

A crucial blow was struck last year by the US anti-trust authorities, which insisted on investigating two vital ICI sales: the $450m (pounds 265m) disposal of Crosfield to W R Grace and the $750m sale of Tioxide to DuPont. Last week, W R Grace used the investigation to stop its purchase; DuPont might follow suit. This would leave ICI with unwanted assets in petrochemicals, pigments, detergents and industrial chemicals.

"I feel ICI paid top dollar for Quest and National Starch. Then it did not sell off fast enough in a deteriorating market. It had to raise pounds 4.3bn in 1997, not by the end of 1998. It needed to sell quickly rather than obtain the highest prices," said Philip Morrish of Nikko Securities.

Now ICI is a distressed seller. Currently it has net debt of pounds 4.4bn and minimal shareholders' funds, and is facing a downturn that could undermine its income and its disposal programme.

Industrial chemicals have already moved into loss. Speciality chemicals are now responsible for 90 per cent of group profits and even they cannot be immune to recession.

The downturn is being exacerbated by a vast programme of Far Eastern investment in the chemicals industry. This new capacity was always likely to lead to a price-induced recession in world chemicals this year. Now the collapse of the Asian economies will worsen the situation as these countries drive their new assets hard to pay off debts.

"I do not understand how ICI did not know about the deteriorating market. They have economists, consultants, advice from the City, people on the ground, and yet they still did not see it coming," said Mr Morrish.

Less critical was Peter Blair at Salomon Smith Barney, who said: "Miller Smith has been visionary in his restructuring and had some bad luck over the past few months."

The first signs of trading problems came in July when Mr Miller Smith conceded that analysts' forecasts for this year were too high. At the height of the euphoria, projections for 1998 reached pounds 1bn, based on a successful disposal programme. Now they have fallen to pounds 300m-pounds 400m; Mr Morrish is predicting they will reach pounds 295m this year and slide to pounds 195m in 1999, with little improvement in 2000.

ICI is being squeezed by a strong pound and a weakening dollar, as well as the downturn in the Far East. Meanwhile, its strategy is progressing agonisingly slowly. The one bright spot is that Tioxide is benefiting from a cyclical upturn and rising prices, so it might still attract the full price from DuPont.

This is not the case for other potential disposals. Petrochemical assets, notably the ethylene cracker at Wilton, face a depressed market. The loss-making industrial chemicals businesses, such as the chlorine/caustic plant at Runcorn, are currently unlikely to attract fierce bids.

"Potential buyers are using delaying tactics to capitalise on ICI's dilemma, in the expectation of buying cheaper," said Mr Morrish.

A fortnight ago, Mr Miller Smith made some optimistic statements about the sale of the bulk businesses, while claiming that they would raise pounds 2bn. This helped the shares stage a temporary recovery.

"We recognise that the market will only fully value ICI as a specialty company when the more cyclical elements of the portfolio are removed," he said. "So we will drive our strategy to its logical conclusion relentlessly and boldly."

There seems to be little alternative. During the 1980s, ICI endured a mediocre financial performance because of the swings of its cyclical businesses. In 1996, polyester profits collapsed because of new capacity coming on-stream, principally in the Far East. The logical response was to switch the weak bulk businesses for higher-quality assets.

"The downturn in the world economies has emphasised the validity of our strategic change," Mr Miller Smith said. Unfortunately, the downturn leaves ICI floundering until the sales are implemented.

ICI's figures for the third quarter next Thursday should reveal signs that even the specialty businesses are suffering from poorer margins. And the slowdown in the world's economy takes its toll of an awful last quarter.

The dividend will not be covered by earnings this year, and if Mr Morrish is correct, not until 2001 at the earliest.

"Personally, I think they will pay the dividend this year," he said. "But if they cut it, there will be blood in Millbank. The institutions will not stand for it."

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
News
i100
News
One father who couldn't get One Direction tickets for his daughters phoned in a fake bomb threat and served eight months in a federal prison
people... (and one very unlucky giraffe)
Arts and Entertainment
Sink the Pink's 2013 New Year's Eve party
musicFour of Britain's top DJs give their verdict on how to party into 2015
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Arts and Entertainment
(L-R) Amanda Peet as Tina Morris, Melanie Lynskey as Michelle Pierson, Abby Ryder Fortson as Sophie Pierson, Mark Duplass as Brett Pierson and Steve Zissis as Alex Pappas in Togetherness
TV First US networks like HBO shook up drama - now it's comedy's turn
Travel
Pool with a view: the mMarina Bay Sands in Singapore
travel From Haiti and Alaska to Namibia and Iceland
News
The will of Helen Beatrix Heelis, better known as Beatrix Potter, was among those to be archived
people
Arts and Entertainment
The Plaza Theatre in Atlanta, Georgia was one of the 300 US cinemas screening
filmTim Walker settles down to watch the controversial gross-out satire
News
Nigel Farage: 'I don't know anybody in politics as poor as we are'
i100
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Selby Jennings: VP/SVP Credit Quant- NY- Investment Bank

Not specified: Selby Jennings: VP/SVP Credit Quant Top tier investment bank i...

Selby Jennings: Quantitative Research | Equity | New York

Not specified: Selby Jennings: Quantitative Research | Global Equity | New Yor...

Selby Jennings: SVP Model Validation

Not specified: Selby Jennings: SVP Model Validation This top tiered investment...

Selby Jennings: Oil Operations

Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

Day In a Page

Aren’t you glad you didn’t say that? The worst wince-and-look-away quotes of the year

Aren’t you glad you didn’t say that?

The worst wince-and-look-away quotes of the year
Hollande's vanity project is on a high-speed track to the middle of nowhere

Vanity project on a high-speed track to nowhere

France’s TGV network has become mired in controversy
Sports Quiz of the Year

Sports Quiz of the Year

So, how closely were you paying attention during 2014?
Alexander Armstrong on insulting Mary Berry, his love of 'Bargain Hunt', and life as a llama farmer

Alexander Armstrong on insulting Mary Berry and his love of 'Bargain Hunt'

From Armstrong and Miller to Pointless
Sanchez helps Gunners hold on after Giroud's moment of madness

Sanchez helps Gunners hold on

Olivier Giroud's moment of madness nearly costs them
A Christmas without hope: Fears grow in Gaza that the conflict with Israel will soon reignite

Christmas without hope

Gaza fears grow that conflict with Israel will soon reignite
After 150 years, you can finally visit the grisliest museum in the country

The 'Black Museum'

After 150 years, you can finally visit Britain's grisliest museum
No ho-ho-hos with Nick Frost's badass Santa

No ho-ho-hos with Nick Frost's badass Santa

Doctor Who Christmas Special TV review
Chilly Christmas: Swimmers take festive dip for charity

Chilly Christmas

Swimmers dive into freezing British waters for charity
Veterans' hostel 'overwhelmed by kindness' for festive dinner

Homeless Veterans appeal

In 2010, Sgt Gary Jamieson stepped on an IED in Afghanistan and lost his legs and an arm. He reveals what, and who, helped him to make a remarkable recovery
Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

Yazidi girls killing themselves to escape rape and imprisonment
Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

Ed Balls interview

'If I think about the deficit when I'm playing the piano, it all goes wrong'
He's behind you, dude!

US stars in UK panto

From David Hasselhoff to Jerry Hall
Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

Grace Dent's Christmas Quiz

What are you – a festive curmudgeon or top of the tree?
Nasa planning to build cloud cities in airships above Venus

Nasa planning to build cloud cities in airships above Venus

Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect