Croda International acquires Iberchem

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Croda International Plc (LON:CRDA), the speciality chemical company that uses smart science to create high performance ingredients and technologies that improve lives, has announced that it has agreed to acquire the entire issued share capital of Fragrance Spanish Topco, S.L., trading as Iberchem, a leading global fragrances and flavours company, for a total consideration of €820m (c.£736m) on a debt-free, cash-free basis. Iberchem has been majority owned by Eurazeo since 2017.

Iberchem was founded in 1985 and is headquartered in Murcia, Spain. As at August 2020, it had approximately 850 employees, 14 manufacturing facilities, 10 R&D centres and a commercial presence in 120 countries. Approximately 80% of its sales are fragrances for Personal Care and Home Care products, areas where it has a similar customer profile to Croda. A further c.20% of sales are generated by its Scentium flavours business, principally for food, pharmaceutical and oral care applications.

The acquisition constitutes a Class 2 transaction pursuant to the UK Listing Rules.

Strong strategic and financial rationale

With the proven impact of fragrances on consumers’ wellbeing and their role as a key ingredient in personal care and hygiene products, the acquisition supports Croda’s Purpose of using Smart Science to Improve LivesTM. It also helps drive the Group’s strategic objectives by focusing on faster growing core consumer markets, adding a new, high-growth adjacency to Croda’s existing Personal Care and Home Care businesses. The key rationale for the acquisition is as follows:

·      Iberchem has an excellent financial track record*. It is a strong and resilient business, having grown consistently year-on-year since 2010, with a revenue CAGR of 15% over the last ten years. In 2019, the business generated €174m (c.£153m) revenue and €34m (c.£30m) EBITDA. Iberchem has continued to trade well, despite recent challenging market conditions due to COVID-19, with 2020 revenue forecast to be €187m (c.£166m) and EBITDA of €40m (£c.36m). Iberchem benefits from a stable EBITDA margin and strong cash generation, with cash conversion in excess of 80% of EBITDA for financial years 2019 and 2020 (forecast), underpinned by its capital-light business model.

·      Gives Croda access to a high growth adjacency in the global F&F market with significant exposure to emerging markets.  The global fragrance market is expected to reach an estimated US$58.8 billion by 2024 with a CAGR of 5.6% over 2020-24 (source: Euromonitor) due to supportive market fundamentals, including a growing global middle class and increasing demand for beauty, health and hygiene products. This growth is being driven by emerging markets, notably in Latin America, Asia-Pacific, the Middle East and Africa, where Iberchem has a significant exposure, with 55% of total sales in Asia and Africa, including 25% in China, and over 80% of its sales in high-growth, emerging markets.

·      Combined business will create a new full service formulation and fragrance offering for Personal Care and Home Care. Iberchem has an extensive portfolio of products across Personal Care (e.g. fragrances for facial care and hair care), Home Care (e.g. fragrances for surface cleaner and fabric care) and in Flavours. Croda’s formulation capability will complement Iberchem’s expertise, developing new ways of meeting customer needs, a service that is expected to be particularly attractive to regional, ‘own-brand’ and independent customers seeking a ‘one stop shop’ solution to their needs.

·      Significant medium and long-term revenue synergies from integrating both businesses. The integration of Iberchem’s R&D and sales team within Croda’s global network will allow Croda to realise significant cross selling and other revenue synergies, which are expected to be at least €25m revenue annually by year three and €48m by year five. Iberchem will be able to leverage Croda’s global network, notably in North America, and existing customer base of c.5,900 Personal Care and Home Care customers. Croda will gain access to c.3,000 Iberchem customers, particularly in certain countries in regions where the Group has historically been under-represented, such as in the Middle East, North Africa and parts of Asia and Latin America.

·      Acquisition expected to be earnings accretive in the first full financial year following completion and strongly accretive thereafter, driven by continued strong EBITDA growth and the realisation of significant combinational synergies. The Acquisition’s Return on Invested Capital (ROIC) is expected to exceed Croda’s cost of capital within five years.

Furthermore, Iberchem offers a:

·      Proven, agile and responsive customer-centric model. Iberchem has close customer proximity, with 14 manufacturing facilities around the world, strategically located to respond and adjust to customer demands. With a focus on delivering tailor-made products at speed, the business is strong in customer niches such as ‘own-brand’, regional and independent consumer brands, a customer profile that is aligned to Croda’s own.  It also benefits from a low carbon footprint and is well-placed to adapt to consumer demand for more sustainable raw materials, a potential differentiator in the market. 

·      Strong customer-driven R&D focus. Iberchem has invested in 10 state-of-the-art R&D centres and employs approximately 240 R&D technicians including 22 perfumers and nine flavourists. This supports Iberchem’s significant manufacturing capability, with it producing an average of 350 new fragrance and flavour references per month. The combination of Iberchem’s customer-driven R&D and its broad portfolio of fragrance and flavour references enables the company to deliver innovative, tailor-made products to its customers.   

·      Continued leadership by a strong executive team with 80 years combined experience. The business will operate as an independent entity but with extensive support from Croda, replicating the successful model the Group adopted following the acquisition of Sederma in the late 1990’s (see ‘Additional information on Iberchem’ for further detail).

Financing and expected timetable

The consideration will be funded via a combination of the Group’s existing debt facilities and the proceeds of an equity placing, representing c.8% of Croda’s issued share capital. The placing of new ordinary shares in the capital of the Company to institutional investors is expected to raise net proceeds of c.£600m.  The Placing is being conducted through an accelerated bookbuild which will be launched immediately following release of this announcement. Morgan Stanley & Co. International plc and HSBC Bank plc are acting as joint global co-ordinators and joint bookrunners in respect of the Placing and have agreed to underwrite the Placing.

In addition to the Placing, there will be an offer made by the Company on the PrimaryBid platform of new ordinary shares in the capital of the Company at the Placing Price (as defined below), to provide retail investors with an opportunity to participate. A separate announcement will be made shortly regarding the Retail Offer and its terms.

On completion, Croda’s leverage is expected to increase modestly to approximately 2 times EBITDA and is expected to reduce to c.1.6 times EBITDA by the end of 2021, with the structure of the financing preserving the Group’s robust financial flexibility and balance sheet strength. 

The acquisition is expected to close by the end of 2020.

Creation of Consumer Care sector

From 2021, Croda will report under four sectors – Consumer Care, Life Sciences, Performance Technologies and Industrial Chemicals. The Consumer Care sector will comprise the current Personal Care business, the Home Care business unit which currently sits within Performance Technologies, and Iberchem. Comparative financial information for 2020 will be provided in Croda’s Full Year 2020 financial results, due for release in February 2021.

Croda current trading and outlook

Trading in the second half of 2020 to the end of October was in line with expectations and the overall trading outlook for the full year remains unchanged. The full year charge for the groupwide share-based payment schemes is forecast to be higher than previously expected due to recent share price performance.

Core Business constant currency sales for the period were 1% above the prior year, excluding the impact of acquisitions, with a steady month-on-month recovery in both consumer and industrial markets. By sector, sales in Personal Care were 5% lower than the prior year, with product mix leading to modest margin dilution, as seen in the first half of the year. Sales in Performance Technologies were also 5% behind the prior year, with profitability continuing to be impacted by its higher operating leverage. Life Sciences saw 18% growth on the prior year (before acquisition benefit), reflecting a rephasing of Crop Protection sales and strong organic growth in Health Care, accompanied by continuing margin development. Regionally, constant currency sales in both North America and Latin America returned to growth year on year, whilst Europe remained behind prior year and Asia was broadly flat, with China continuing to grow.

*Footnote

Source: company information, financials as per management accounts (unaudited);

(1) 2019A: including net sales contribution of Flavour Inn Corporation and Duomei from September 2019 and December 2019, respectively

(2) EBITDA including IFRS 16 impact from 2019A onwards, stock margin intercompany adjustments, and 2019A acquisitions (Flavour Inn Corporation and Duomei) proforma impact

(3) Cash conversion defined as (EBITDA – capex) / EBITDA per Iberchem definition

Steve Foots, Croda International’s Chief Executive Officer, commented:

“Our expansion into the fast-growing fragrances and flavours market further increases our exposure to Consumer Care markets and adds another exciting growth adjacency to Croda’s market-leading position. We have known Iberchem’s team for many years and their business is highly compatible with Croda’s. Iberchem stands out with its significant exposure to emerging markets, extensive product portfolio well placed to adapt to sustainability trends, strong customer focus and R&D capability, and 10 year track record of consistent year-on-year growth. By bringing our businesses together, we are creating a new, full service offering to our customers in Consumer Care markets and a compelling platform from which to grow the combined business in the years ahead. We look forward to welcoming our new colleagues to Croda and leveraging our respective networks and expertise.”

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