DSM forges nutrition and fragrance giant with Firmenich deal

By Ludwig Burger and Bart H. Meijer

AMSTERDAM (Reuters) -Dutch specialty chemicals maker DSM struck deals to take over Swiss flavour and fragrance maker Firmenich and sell its engineering plastics division to become a major player in the fast-growing food ingredients and health products markets.

Shares in DSM jumped as much as 12.6% after the company said on Tuesday that its shareholders will take 65.5% of the shares in a new group called DSM-Firmenich, while the owners of unlisted Firmenich will receive a 34.5% stake of the combined entity plus 3.5 billion euros in cash from DSM.

Analysts at brokerage Stifel said the transaction would "create a new giant in the nutrition space, and the only one to combine flavours and fragrances with nutritional benefits".

Firmenich's businesses include making food ingredients and scents for detergents and creating fragrances for brands such as Calvin Klein and Mugler.

At about 11.4 billion euros ($12.3 billion) in combined 2021 revenue, the new player will contest IFF Inc's leadership in the market for fragrances, flavours and ingredients for food and cosmetics. IFF, which last year combined with DuPont’s Nutrition and Biosciences business, had $11.7 billion in 2021 sales.

In a back-to-back deal that concludes DSM's exit from industrial materials, DSM also agreed to sell its engineering plastics division to German peer Lanxess and private-equity firm Advent for 3.85 billion euros including assumed debt.

Stifel analysts said the Firmenich deal values the Swiss company at 19.2 billion euros including debt, based on DSM's closing price on Monday. Also based on that price, DSM said its contribution to the merged entity had an implied value of 21.6 billion. It would not provide an overall valuation.

But the nominal price tag for the combined group, working out at close to 41 billion euros, was marked up heavily on Tuesday, with DSM shares last up 8.2%, giving up some initial gains. Shares in Lanxess jumped more than 11% to a two-month high. The two stocks were Europe's top performing shares on Tuesday.

"We're bringing together two iconic companies, where DSM is strong in health and nutrition, and Firmenich is very strong in fragrances and taste," said DSM co-Chief Executive Dimitri de Vreeze.

"That creates solutions where we have health, sustainability, and tastes and flavour as being key for the future," he added.

Firmenich's owners would become long-term shareholders of DSM-Firmenich, the two companies said, describing the transaction as a "merger of equals".

DSM's board Chairman Thomas Leysen and DSM's co-CEOs Geraldine Matchett and Dimitri de Vreeze will take on the same roles at the merged group.

Firmenich Chairman Patrick Firmenich, from the fourth generation of the founding family, is to become vice chairman, and the family is set to become the largest shareholder group in the new entity.

Givaudan and Symrise are the runner-ups in the market share ranking for fragrances, flavours and ingredients for food and cosmetics. The industry, which has been expanding into functional food and health ingredients, offers strong growth, driven by consumers in emerging markets, with few cyclical swings.

DSM and Firmenich said the merged group, expected to be created in the first half of next year, could see organic sales growth of 5% to 7% per year, while realising annual synergies from cost savings and new revenue opportunities of 350 million euros.

DSM said last September that it would focus purely on ingredients for food and health products, having sold a unit making resins and coatings to Germany's Covestro https://www.covestro.com/press/covestro-successfully-completes-acquisition-of-resins--functional-materials-business-from-dsm for about 1.6 billion euros earlier in the year.

DSM last month agreed to sell its protective materials business, part of the materials division, to Avient Corp for $1.48 billion.

Sales of its nutrition division, which produces goods ranging from vitamins and other supplements to baby formula and animal feed, rose 10% to 7 billion euros last year. DSM's total sales were 9.2 billion euros in 2021.

Firmenich reported sales of 4.5 billion Swiss franc ($4.7 billion) last year. Both companies realised an adjusted core profit margin (EBITDA) of around 20%.

DUAL HQ

The new company will have dual headquarters in Kaiseraugst near Basel, Switzerland, and in the Dutch city of Maastricht. Its legal domicile will be in Switzerland but the shares will be listed on the Euronext Amsterdam exchange.

The merger will be effected through a public offer of DSM shares, in which current DSM shareholders can exchange their share for a share in the new company.

Lanxess and Advent said in a separate statement they formed a joint venture to acquire DSM's Engineering Materials business, a maker of plastics mainly for car parts, for 3.7 billion euros including assumed debt.

Lanxess will transfer its own engineering plastics business into the new venture, receiving a stake of up to 40% and a cash payment of at least 1.1 billion euros in return.

Under a drive to become less dependent on the cyclical auto industry, Lanxess secured an option to sell its stake to Advent after three years.

($1 = 0.9325 euros)

(Reporting by Ludwig Burger in Frankfurt, Bart Meijer and Toby Sterling in Amsterdam, Emma-Victoria Farr in London, Patricia Weiss in Frankfurt, Mike Shields in Zurich; Editing by Kim Coghill and Susan Fenton)