Lanxess has said it will spin-off its Fine Chemicals operations into a separate business unit that is expected to become independent as of the second quarter next year.
The new company, Saltigo, will have around 1,400 employees, and will be among the largest companies worldwide that supply chemicals to the pharmaceutical and agricultural industry.
The company will focus on custom manufacturing, covering three business segments, namely pharma, agro, and specialties. Saltigo will operate as a wholly owned affiliate of Lanxess, which have put up €50 million in capital investment towards the new business.
Despite overcapacities and overall economic turbulences, custom manufacturing can be a highly profitable business. Attractive EBITDA margins of around 18 per cent of sales have been achieved in the past by other companies.
Currently Fine Chemicals has annual sales of €400 million, but the CEO Axel Heitmann was recently quoted as saying Lanxess saw a higher potential for the business.
Speaking to In-Pharma Technologist.com at the CPhI show in Madrid, Dr Axel Westerhaus, Head of Fine Chemicals Business Unit of Lanxess Deutschland said that in order to create optimum conditions for Saltigo, the closing of unprofitable facilities would be considered.
"We must reduce our production costs by around a quarter. Through this and other measures we shall manage to close the gap between our cost structure and that of our competitors," he said.
In talks with the Works council, headcount from 1,900 to about 1,400 employees in 2007. This would be financed in part through voluntary wage renunciations for all employees of Lanxess Deutschland GmbH and Lanxess for three years.
"Based on industry benchmarks, we have worked out a plan to redesign the company to bring all resources to the right size. Appropriate solutions, such as outplacement and severance packages, for about 500 employees will be negotiated within the next two years," Westerhaus added.
This series of protective measures for employees is the first time that a business such as Lanxess has been implemented, setting a precedent for those companies hoping to take a similar route to consolidation.
According to Westerhaus, this gives the new mid-size company the financial strength and stability of having a big chemical player in the background and the benefit of backward integration.
"To be successful in the project-oriented service business requires different structures from the ones we had when our primary aim was to serve other Bayer and later, Lanxess divisions," he said.
Only this week, Lanxess revealed it was to close the Trenton, New Jersey facility of its Rhein Chemie subsidiary and transfer production to the Chardon, Ohio plant by the end of 2006.
Lanxess said the package was designed to save Lanxess €60 million per year worldwide.
Rhein Chemie manufactures a variety of products for the rubber, lubricants, plastics and polyurethane industries.
Westerhaus was adamant that Saltigo was not constructed to eventually sell-off. "Saltigo is the result of a joint effort between the three units of LanXess. We are taking what's good and developing the new company, leaving the bad out," he said.
Westerhaus also spoke about the future challenges of the competitive industry they were entering, believing that only 10-12 custom manufacturers would remain in the market a decade ahead.
"To cover all segments of the industry, you have to become a company that is the size of Lonza. This is not possible for some companies. When you consider what has happened to other players in this fine chemicals market, it has been characterised by the need for further consolidation."