DSM To Acquire Leading Position In Vitamin Supply Market With Roche Deal

Dutch life sciences and performance materials producer DSM will enter the vitamin and carotenoid supply business at the top with the planned acquisition of Roche's Vitamins and Fine Chemicals division.

Under an agreement announced Sept. 3, DSM will purchase Roche's Switzerland-based operation for roughly $2.24 bil. (€1=$.99).

Roche is the world leader of the global vitamin and carotenoids markets with shares of 40% and 75%, respectively, according to DSM. German chemicals firm BASF, which ranks second in both markets, controls 21% of the vitamin segment and 23% of the carotenoids category.

With annual sales of $1.2 bil. and $490 mil., vitamins and carotenoids combined represent 71% of the Roche division's revenues. Fine chemicals, including feed enzymes, citric acid and UV filters, contribute the remaining 29%.

With the purchase, DSM will double the size of its life sciences business to $4.7 bil. Sales for the Roche division reached approximately $2.4 bil. in 2001, while DSM's existing food, pharmaceutical and cosmetics raw materials revenues totaled roughly $2.3 bil.

The move also will boost the company's overall sales to approximately $8 bil. and represents a major step toward DSM's previously stated goal of reaching $10 bil. in revenues by 2005.

Noting cosmetics ingredients will represent a minor part of the combined businesses, DSM maintained it considers cosmetics to fit with its life sciences focus and has no plans to divest that part of the Roche unit. Cosmetics ingredients will account for only 3% of the combined entity, or approximately $140 mil.

The purchase price for the Roche group is slightly below the division's 2001 sales, reflecting the current softness in the vitamin business and the aftermath of heavy price-fixing fines incurred by the group.

Addressing the price, DSM observed, "we are at the stage where no crazy prices are being paid as were being paid in the past and indeed you can buy a business when in the downcycle, at the point in time when it's probably more favorable than if you bought it at the time when it was much more expensive."

Roche vitamin and fine chemicals sales were down slightly to $1.18 bil. in the first half and earnings before interest, taxes, depreciation and amortization dropped 20% to $173.4 mil.

Results reflected a "strong drop" in first quarter profitability due to weak demand and slight price erosion, DSM noted. The company added that although the second half is expected to be stronger, it is unlikely to make up for the first half decline.

The deal is expected to close in the first quarter of 2003, pending approval by the European Commission. DSM said it does not expect to encounter problems with clearance because there is no substantial overlap between the businesses.

Discussing prospects in the U.S. vitamin market, DSM asserted the overall market "is growing" despite declines in the dietary supplement category and emphasized Roche's position as a supplier to a "broader business."

Half of the division's sales are to the animal nutrition and health industry, while human nutrition and health account for 39% of the unit's revenues.

Terms of the acquisition call for present and future liabilities from remaining vitamin price-fixing cases to remain with Roche. To date, the firm has paid over $1 bil. in related fines and settlement fees.

Roche was fined $500 mil. by the U.S. Justice Department in 1999 for involvement in the vitamin cartel (¹ (Also see "Wright Enrichment Lawsuit Seeks Class Action Against Vitamin Price Fixing" - Pink Sheet, 24 May, 1999.), p. 13). The firm's share in the settlement of a multi-state class action suit in 2000 was $187.2 mil. (² (Also see "Vitamin Price-Fixing $335 Mil. Settlement Reached For Indirect Purchasers" - Pink Sheet, 16 Oct, 2000.), p. 5).

In late 2001 the European Commission fined Roche close to $60 mil. for citric acid price-fixing, and over $400 mil. for vitamin price-fixing in 2001 (³ 'The Tan Sheet' Dec. 10, 2001, In Brief and ⁴ 'The Tan Sheet' Nov. 26, 2001, In Brief).

Roche had announced in February it intended to divest its vitamin business in order to concentrate on its pharmaceuticals and diagnostics operations (⁵ (Also see "Roche Vitamins Divestiture Will Not Occur Piecemeal, Chairman Says" - Pink Sheet, 4 Mar, 2002.), p. 3).