Thu. Jul 7th, 2022


Ernest Solvay revolutionized the process for making soda ash in the 19th century. The € 12bn Belgian company that bears his name is still the world’s largest manufacturer of the compound. But its focus is currently on financial, not chemical, engineering.

On Tuesday, Solvay said it planned to split its business into two, separating the faster-growing specialty growth business from the mature chemicals business via a spin-off in the second half of next year. The move aims to unlock a conglomerate discount and add fizz to lagging shares.

Solvay had already stated its intention to rejig the portfolio at results in February. The choice to spin off, rather than divest, the assets is another possible consequence of the Ukraine conflict.

Used in glass making, soda ash is a widely made commodity chemical. Bundled beside other cash generative assets, this business should appeal to dividend-seeking investors. The faster-growing materials business, meanwhile, will command a higher rating, providing the valuation lift.

Solvay’s enterprise valuation of just 6 times forward ebitda pales against specialty peers. The UK’s Victrex trades at 15 times while Hexcel of the US is on an 18 times ebitda multiple. Even a 10 times multiple for Solvay’s new specialty business would value it at about € 13bn or more than the current group total. Add in the soda ash and other mature assets on a 5 times multiple and that rises to € 18bn. That would be a 50 percent potential upside for shareholders.

Things will be less straightforward in practice. Soda ash manufacturers in Europe will need to invest to reduce their carbon footprint in coming years, says Sebastian Bray of Berenberg. That means a creeping disadvantage compared to rivals outside the EU. Many of the latter mine, rather than manufacture, the soda ash. That is a less energy-intensive process.

Management failed to provide estimates on how much free cash flow this will require. There were also few details on how the € 2.2bn of net debt or the environmental liabilities worth € 648mn last year will be split. Both are likely to be a drag on the legacy business and its valuation.

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