Lanxess sold its rubber empire to Aramco and turned an €85m loss into €431m profit

In 2014, Lanxess — the chemicals company spun out of Bayer a decade earlier — was being whipsawed by commodity prices. Its synthetic rubber and butadiene businesses, built up as the tyre boom peaked, collapsed just as hard: the group posted an €85m net loss for 2014 and cut its dividend to €0.50. In May 2014 Matthias Zachert, the group's chief financial officer until 2011, returned as chairman of the board of management with a mandate to rethink the portfolio.

The realignment was symmetrical. On the way out: synthetic rubber. Lanxess folded it into a 50/50 joint venture with Saudi Aramco, ARLANXEO, in 2016, and by the end of 2018 had sold its remaining half back to Aramco for roughly €1.4bn — what Zachert's 2018 letter calls 'the biggest milestone in our strategic realignment launched in 2014'. On the way in: profitable mid-sized specialty chemicals, chiefly the purchase of US chemicals group Chemtura, announced in September 2016 at about seven times EBITDA against a 17% margin, with €100m of targeted synergies.

The 2015 annual report shows the first leg of the turn: the 'advance!' cost programme and portfolio pruning returned the group to a €91m net income, and the dividend was raised 20% to €0.60 as 'a signal of the company's increased' strength. By 2018, the continuing specialty business ran at €7,197m of sales with EBITDA pre exceptionals of €1,016m (14.1% margin), net income of €431m against €87m a year earlier, and earnings per share of €4.71.

The exit from rubber did more than lift profits. The letter argues it 'significantly reduced our dependency on the volatile tire and automotive industry' and improved the group's sustainability metrics, and in mid-2018 Moody's, Scope and S&P each upgraded Lanxess by one notch — the market's confirmation that the residual business was structurally stronger than the one Zachert inherited.

Net income swung from -€85m in 2014 to €431m in 2018; EBITDA pre exceptionals reached €1,016m at a 14.1% margin, and all three rating agencies upgraded the debt.

Rubber tied Lanxess earnings to tyre cycles and butadiene spot prices; specialty chemicals carry steadier, higher margins over the cycle.

Chemtura was bought at roughly seven times EBITDA with a 17% margin already in place — management expected it to be earnings-accretive in the first full year after closing.

Staging the exit as a joint venture, then a full sale, kept rubber cash flowing while the specialty acquisitions were being digested.

The rating upgrades lowered funding costs and validated the realignment to the capital markets that had priced Lanxess as a commodity cyclical.

Portfolio surgery works when symmetrical: cut the volatile commodity business, buy a profitable one. Lanxess rebuilt its fortunes on chemicals expertise it already had.

The 2018 report sketches the target state under the banner 'LANXESS 2021': a more stable specialty chemicals company with stronger cash flow, a balanced portfolio and a reinforced presence in North America and Asia. The company kept bolt-on acquisitions going (Solvay's US phosphorus chemicals business in 2018) and even began studying lithium extraction from brine at its El Dorado site with Standard Lithium. Zachert stayed in the chairman's chair, and the group that entered 2014 as a rubber cyclical now trades as a diversified specialties house.