Swiss Chemical Makers Spread Beyond Switzerland As Franc Bites

Swiss chemicals makers Lonza Group AG (LONN.VX) and Clariant AG Wednesday flagged more takeovers, partnerships and production site shifts to spread beyond their home market Switzerland and limit their dependence on the strong franc, which hurt first-half results.

Both companies have embarked on a buying spree to limit the impact from the rising franc, which is expected to remain strong on safe-have demand amid the sovereign debt crisis.

The Swiss currency's strength has meanwhile squeezed already-depressed margins within the chemicals industry, which is under price pressure from low-cost Asian manufacturers.

Basel-based Lonza reported a 28.1% drop in first-half net profit to 97 million Swiss francs ($120.9 million) from CHF135 million a year earlier, due to currency swings. It said it will look out for acquisitions and partnerships after its $1.2 billion takeover of U.S. biocides maker Arch Chemicals Inc (ARJ).

"We expect to do two to three small-to-mid-sized takeovers a year and want to do more partnerships, especially in emerging markets," said Chief Executive Stefan Borgas. He singled out markets such as Brazil, Russia, India and China, which have recently improved legislation for high-value chemicals used for the production of medicines and food, Lonza's key business areas.

CEO Borgas said the company is also considering to move some of its production outside of Switzerland, where Lonza currently employs more than a third of its staff base of around 8,200. But no job cuts were planned at the moment, he said, soothing rising concerns the strong franc could trigger massive layoffs in the Swiss manufacturing sector.

Swiss Socialist Party President Christian recently warned the country could lose some 100,000 jobs if the franc continues to rise. A recent survey by consultancy Deloitte found that Swiss chief financial officers fear the buoyant franc could curb economic growth.

Clariant, which earlier this year bought Germany's Sued-Chemie AG for around EUR2 billion, saw second-quarter sales fall 1% to CHF1.97 billion while net profit, which rose to CHF38 million, failed to meet expectations. The company said the strong franc shaved off some CHF290million from sales and hit operating earnings by CHF94 million.

Chief Financial Officer Patrick Jany said Clairant's transfer of production sites outside its headquarters in Muttenz to Spain, Brazil and India should help it reduce costs. Acquisitions should also help Clariant move forward. While CEO Hariolf Kottmann excluded large deals for the time being, Jany said "Clariant will continue to look at smaller targets."

Given the financial and economic situation, consultants expect more such deals, in part due to the Swiss franc's strength.

Marc Reinhardt, M&A advisor at Ernst & Young Switzerland, said "companies are going out and buying firms in the euro area and also emerging markets and the strength of the franc is making it easier for them in some cases."

Construction chemicals maker Sika, which saw first-half net profit dive 24.5% to CHF113.6 million from CHF150.5 million a year earlier, has already in 2010 broadened its business in countries such as Japan and the U.S. and recently pursued takeovers in Italy and China. Such deals, which analysts expect to continue amid a building boom in China and elsewhere, have however helped Sika lift first-half sales 6.6% to CHF2.09 billion even though the franc shaved off more than 10% of its revenue.

-By goran Mijuk, Dow Jones Newswires, +41 43 443 80 47; goran.mijuk@dowjones.com

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