Croda to buy stake in China’s Sichuan Sipo Chemical

UK-based Croda International Plc, the world’s second-largest maker of cosmetic ingredients, announced that it has received approval from the Chinese government to buy a 65% stake in Sichuan Sipo Chemical Co. Ltd (“Sipo”), an unlisted natural specialty chemical manufacturer based in Mianyang City, Sichuan Province, China.
Completion of the transaction is subject to customary closing conditions which are expected to be completed within the next few weeks.
The transaction is valued at GBP38.2 million (US$58.7 million). Croda is paying a multiple of almost 19 times earnings before interest, taxes, depreciation and amortization, based on 2012 profits of GBP3.1 million (US$4.7 million), for the 65% stake in Sipo.
“The reason behind the valuation from our point of view is that it gives us fast growth and specializes the business quickly, so there should be a margin improvement and growth story,” Chief Executive Officer Steve Foots said. “It allows us a ready entry into a market that we’re starting to know much better.”
Sichuan Forever Holding Co. Ltd will continue as the minority shareholder, retaining a 35% equity interest in Sipo. Sipo was established in 1993 and has approximately 300 employees. The company makes specialty derivatives from natural raw materials and its products include primary amides, novel fatty acids and specialty esters.
A state-of-the-art, well invested production facility, custom built in 2011, will provide additional capacity from the outset and increase Croda’s proximity to customers in the region, strengthening its existing operations across China and the Group’s overall position in Asia. Sipo will also consolidate Croda’s global leadership in fatty acid amides and add new technology that will enable the Group to expand its portfolio across a number of its core markets.
Apart from a small number of by-products, all of Sipo’s products will be sold through the Croda global sales network. Croda’s initial focus is to grow sales from its Performance Technologies business to the Polymer Additives and Lubricants sectors, to tap growing demand for lubricant additives, which are used in engine oil formulations.
A European automotive industry contraction cut demand for additives in lubricants, coatings and polymers, with sales at Croda’s performance technologies business declining 0.7% to GBP100.8 million (US$154.9 million) in the second quarter.
Sipo will become part of Croda’s Performance Technologies division, which has come to the fore amid competition and a slowdown in growth in the cosmetic-ingredients business that was the main growth driver. Foots is trying to address the performance unit’s skew toward Europe and get margins close to the levels achieved for consumer-product ingredients.
The Sipo deal is Croda’s largest since the purchase of Uniqema for US$742 million at the time. It also gives Croda access to a rapeseed variety that Sipo plants to extract raw materials for its polymer additives that can be used in areas such as food-packaging films.