ICI solution may not prove strong enough

News Analysis: Despite its disposals programme, the chemicals giant is still stuggling against a mountain of debts
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ICI MOVED a step closer to completing a mammoth corporate transformation yesterday when it announced the pounds 1.7bn sale of three large businesses to Huntsman, the privately-owned US chemicals company.

The one-time stock market bellwether, still struggling to reduce its multi-billion pound debts, sealed the crucial sale of its polyurethane, tioxide and petrochemicals businesses nearly two years after it said it was planning the sale.

The deal with Huntsman was greeted with relief in the City, where shareholders have grown increasingly impatient with the slow pace of ICI's disposals. Yesterday the shares closed up 3 per cent at 653p.

The deal is the last major transaction in ICI's disposal programme, bringing the value of businesses sold off to pounds 5.2bn. The group will keep a 30 per cent stake in the businesses for at least three years.

In the last two years, ICI has begun to look in danger of being buried under a mountain of debt as it struggled to force through one of the most ambitious corporate transformations ever undertaken by a FTSE company.

Charles Miller Smith, ICI's chief executive, has wanted for two years to turn ICI into a modern business focused on specialty chemicals and paints. Since May 1997, when he spent pounds 4.8bn buying speciality chemicals from former colleagues at Unilever, he has struggled to reduce the resulting debt.

Few analysts quarrel with the strategy. The plan is to complete the corporate transformation by getting rid of industrial chemicals - businesses that proved highly vulnerable to cyclical downturns following the Asian financial crisis.

But the timing has worked against ICI. Industrial chemicals are still suffering from the worldwide economic slow-down, and buyers are thin on the ground. Few public companies have the stomach for seeing a large chemicals business through such a deep trough in demand.

Where buyers have been found they have hardly been ideal. In October last year ICI called off the sale of its Crosfield chemicals business to WR Grace, a US company, after talks collapsed over price and terms.

In January, ICI suffered a double blow when US regulators blocked the pounds 700m sale of its worldwide Tioxide businesses - which manufactures paint- whitening chemicals - to DuPont, the US chemicals giant. At the same time ICI had to shed 500 jobs from other divisions in Runcorn and Warrington.

Coming at a time when ICI was spending half its earnings on servicing its debts, the failed sales devastated ICI's share price. Even after yesterday's uptick, the shares remains more than 40 per cent below their peak a year ago.

Huntsman, a family business owned and run by its effusive chairman John Huntsman, has no need to soothe anxious shareholders as they await the upturn. But while in that respect it seems an ideal buyer, it also has a reputation for buying on the cheap, at the bottom of the cycle.

Observers believe shareholder concern about the debts may have forced Mr Miller Smith's hand at the negotiating table.

"These deals have not realised the value they could have done," said Michael Eastwood, an analyst at Dresdner Kleinwort Benson. "However I doubt they could have got a better price at this stage of the chemicals cycle. The strategy is 100 per cent right. But they've been stuffed by the market, stuffed by Asia and stuffed by the strength of sterling."

To some the prices fetched are evidence that yesterday's deal, trumpeted as good value for ICI, was really a fire-sale. The polyurethane business was sold at a multiple of 11.7 times last year's trading profit - an average valuation for the sector. But Huntsman bought Tioxide for pounds 150m less than DuPont offered, at a multiple of just eight-times last year's earnings.

"The chemicals industry is notorious for companies trying to get the better of each other, and without a doubt the prices are not high," said David Phillips, an analyst at Sutherlands, the stockbroker.

Elliott Zissman, of HSBC Securities, estimates that the petrochemicals side of the business has been sold at a multiple of just 0.23 times its sales. "The businesses have been sold at prices which you normally wouldn't offer a trade buyer, even at the bottom of the cycle," he says.

ICI has more sales in store: executives now want to sell the acrylics business. But the City is still waiting for the group to escape its mountainous debts.

After yesterday's sale, ICI's net debts will drop from pounds 4.2bn to pounds 2.9bn. But earnings will also fall: the group will still be earning only 2.3 times the cost of its debts. "The debts are quite a destroyer of value and this sale was absolutely crucial. The group is worth more now. But the share price still reflects the hope of a really big deal that will get the debts down. You can expect ICI's valuation to be lower in future," said Mr Phillips.