Evonik Industries AG

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2 SEPTEMBER 21, 2010 GLOBAL CORPORATE FINANCE Chemicals: Evonik’s chemicals business is one of the world’s leading specialty chemicals enterprises, with approx. 80% of revenues generated from products that hold top three market positions globally. The group’s chemicals portfolio is widespread, ranging from commoditised chemical applications in its industrial chemicals business to more stable and higher-margin applications in its health & nutrition sub-segment. EI also benefits from “Verbund” structures in silicon, its C4 chemistry business, isophorone and Methylmetacrylates (MMA), which offers better control over supplies and higher margins. EI’s chemicals portfolio is geared towards a wide array of end industries, including automotive, construction, food, pharmaceuticals, home & personal care, and oil & gas. Energy: EI’s energy business is the fifth-largest power producer on a basis of long-term contracts in Germany, with 10,201 MW of installed capacity in 2009, albeit with limited market share compared with the four largest players (RWE, Eon, Vattenfall and EnBW). EI primarily operates coal-powered power plants and its installed power generation capacity is split approximately 80%/20% between its domestic market and international locations (Turkey, Colombia and the Philippines). Besides its generation activities, Evonik also provides engineering expertise in the construction of power plants. The group is currently seeking to divest a stake in its energy business. Real Estate: With around 60,000 units (as per end of 2009) in the largest German state, North Rhine- Westphalia (NRW), EI’s real estate business is one of Germany’s largest residential real estate companies. EI also holds a 50% stake in THS, which owns approx. 73,000 residential units. In the medium term, EI is seeking to spin off its real estate business. Shareholder Structure and Management Strategy On 8 November 2007, Germany’s lower house of parliament approved the proposed coal mining financing legislation. This constituted a key milestone in a process that would ultimately lead to the complete discontinuation of the country’s hard-coal mining activities by the end of 2018, in line with the agreement made in February 2008 on a compromise between the German federal government, the states of NRW and Saarland, RAG AG and the IG BCE trade union. As part of the reorganisation process necessary to implement the compromise, the RAG group was sold to RAG-Stiftung, a foundation set up under German civil law. Subsequently, all of its non-coal businesses, which are held by EI, were separated from the subsidised hard-coal mining operations conducted by Deutsche Steinkohle AG (DSK). In July 2010, the European Commission approved a proposal for a regulation to allow state subsidies for loss-making coal mines only if plans for a closure by October 2014 are presented. In order to align the different time schedules negotiations between the involved parties will follow.If executed as proposed, the decision by the European Commission could increase pressure on RAG-Stiftung to fund mining liabilities four years earlier than initially anticipated. RAG-Stiftung owns 74.99% of EI, with the remaining stake owned by CVC. In order to raise the necessary funds to wind down the hard-coal mining activities, RAG Stiftung accumulates cash from dividends. Moody’s understands that it is the shareholders’ intention to sell their stakes through an initial public offering (IPO), notwithstanding that RAG-Stiftung would most likely keep a minority stake in EI post-IPO. ANALYSIS: EVONIK INDUSTRIES AG
3 SEPTEMBER 21, 2010 FIGURE 2 Shareholder structure of Evonik Industries AG ¹ domination and profit-and-loss transfer agreement Source: Evonik Industries AG Stronger focus on EI’s chemicals operations ... GLOBAL CORPORATE FINANCE Following a strategic review of the group’s operations and market opportunities at the end of fiscal year (FY) 2009, EI is currently in the transition from its conglomerate structure to becoming a focused chemicals company, paying specific attention to trends such as resource efficiency, health & nutrition and globalisation of technologies. In order to improve the breadth and strength of the group’s chemicals portfolio, EI will aim to reduce its exposure to energy and real estate. The group is well advanced in the process to sell a stake in its energy business, with potential bidders having submitted non-binding offers in a second round of bidding. Proceeds from a sale are likely to be kept in the group and used both to reduce leverage and to fund development projects at the chemicals division through a combination of organic and external growth initiatives. EI is considering a possible listing for the real estate business or the sale of a minority stake in the business in order to reduce its exposure to real estate. However, in the meantime, EI is likely to merge its real estate operations with THS. This entity owns around 73,000 units in NRW and is 50% controlled by EI and 50% by labour union (Vermögensverwaltungs- und Treuhandgesellschaft der Industriegewerkschaft Bergbau und Energie mbh (IGBCE), Hannover). ... and continued attention to cost optimisation ... CVC Funds RAG-Stiftung 100% 1 25.01% Evonik Industries AG Evonik Degussa GmbH Evonik Steag GmbH Evonik Immobilien GmbH Evonik Services GmbH Directly and indirectly 74.99% In early 2009, EI launched a cost optimisation programme, “On Track”, with the aim of reducing annual costs sustainable by €500 million by FY 2012. This programme is broad-based and focuses on operational improvements, administrative and corporate centre costs, shared services costs, and sourcing. EI is progressing well with the implementation of the programme, with more than one quarter of sustainable savings achieved at the end of FY 2009. It is also likely that EI will achieve savings slightly exceeding €550 million, which is higher than initially anticipated. ANALYSIS: EVONIK INDUSTRIES AG
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