This month, Bayer expects to begin receiving binding bids for its flavors and fragrances subsidiary Haarmann & Reimer. Bayer put H&R on the block at the end of November 2001 and has said it hopes to raise roughly $1.3 billion from the sale.
The sale in a sense marks the end of an era: Bayer follows Roche, which spun off its Givaudan division in 2000, in ending a decades-long involvement with the flavors and fragrances, or F&F, industry. The industry itself has global sales that will probably top $16 billion this year.
The only remaining major F&F business held by a chemical company is Quest International, owned by ICI. Quest--cobbled together from a number of smaller suppliers--became part of ICI when ICI purchased Unilever's specialty chemicals business in the mid-1990s; unlike its peers, ICI considers the sector one of its core interests.
So now, industry gossip is turning on who is to buy H&R. Bayer invited some seven or eight companies to bid for the unit. Degussa--currently in the business only in a minor way--is one; other F&F suppliers are logical candidates as well. And at least some industry observers are hoping for "fresh blood" from private financial investment companies, for example.
Of today's top tier of F&F companies--those with sales of $800 million and up--International Flavors & Fragrances (IFF) of New York City, Japan's Takasago International Corp., and Givaudan are the only ones with publicly traded stock. Firmenich, based in Geneva, is privately held. Quest is part of ICI, and H&R--for now--is part of Bayer.
Milwaukee-based Sensient Technologies is aiming to join the big leagues through an ambitious program of acquisitions. It has edged its way into the top 10, according to rankings by industry consultants at Canton, Ga.-based Leffingwell & Associates, followed by Japan's T. Hasegawa, Germany's Dragoco, and France's Mane S.A. Bush Boake Allen had been in the top 10 before it was acquired by IFF in 2000. All have sales in the F&F field in the range of $200 million to just over $500 million.
From there, the industry fragments into a host of much smaller players. In fact, as consultants at SRI International pointed out in a study published at the end of 2001, a characteristic of the F&F industry "is the virtual absence of medium-sized participants," with sales of $75 million to $100 million.
That opens a potential for smallish, select acquisitions, of course. For example, Sensient earlier this spring acquired the German firm C. Melchers, which has sales of about $14 million per year and supplies flavors for coffees and teas as well as essential oils and aroma chemicals.
BUT OPENINGS for larger acquisitions still remain. Witness Givaudan's buy in January of Nestlé's flavors business, Food Ingredients Specialties (FIS), in a transaction valued at roughly $450 million. Jürg Witmer, Givaudan's chief executive officer, calls the acquisition "an important step forward in attaining undisputed industry leadership."
And in 2000, IFF paid $970 million for Bush Boake Allen, whose sales in 2000 were just over $470 million. Subsequently, in December 2001, IFF sold to financial company Close Brothers Private Equity the former Bush Boake Allen aroma chemicals business in Widnes, near Liverpool, England. CBPE will operate the unit as a newly independent company to be known as Aroma & Fine Chemicals Ltd., and it is expected to have sales of about $30 million per year.
Key to making the big acquisitions, Givaudan's Witmer believes, is speed and flexibility. He says, "It took us no longer than three months from the beginning of negotiations with Nestlé to the conclusion. We had small teams, and everything was done in-house, except for attorneys, so we were able to keep this deal under wraps. It came as a surprise even to most people in this company. When the opportunity arises, we can move very quickly."
And there is still little danger of the industry's top tier becoming so consolidated that alarm bells will ring in the offices of antitrust authorities, Widmer points out. "If you look at the market shares of even the number one and number two, if we were to merge with IFF, we would still be under the theoretical threshold of acceptance," he says.
More resistance would come from customers, adds Peter Wullschleger, director of investor relations at Givaudan. "Antitrust authorities would closely follow any major mergers or acquisitions," he says. "But a more important factor is the customers--they would not allow too much consolidation, leaving them with little or no choice."
However, Wullschleger predicts that the F&F industry will continue to see more consolidation. "The industry as a whole is reacting to the concentration of its customer base," he points out. For example, there are more and more mergers and streamlining of portfolios in customer industries such as personal products, household products, and foods. Customer companies draw up a call list of suppliers, who are then sent bidding document briefs, explaining the flavor, fragrance, or ingredient wanted. With the number of customers going down through consolidation, buyer pressure on suppliers is increasing, Wullschleger says.
THAT IS WHAT is giving the boost to big companies, he argues. The smaller companies, on the other hand, are the ones being squeezed. "They will have trouble," Wullschleger says. "If an F&F company is not strong in all markets, it will not be able to serve the large customers like Unilever or Procter & Gamble."
No matter what their size, however, companies in the business are cheered by the relatively healthy growth of the industry.
A recent study by the market research firm Freedonia Group forecast growth in global demand for flavors and fragrances of 5.4% per year, with the industry reaching $18.4 billion in 2004. The growth will be driven by strong gains in the developing regions of Latin America and Asia, outside of Japan.
Particularly strong growth is forecast for China, Brazil, India, and Mexico, as well as smaller markets such as Vietnam and Chile. "These countries are experiencing robust growth in their food-processing and consumer-product manufacturing industries, bolstered by strong international investment activity," the study says.
In contrast, growth in the world's developed markets "will continue to be sluggish. Growth will be held down by market maturity, trends favoring less flavor- and fragrance-intensive consumer goods, consolidation in end-user industries, and strong downward pressure on prices."
The industry's supply and demand have historically been dominated by Western Europe, the U.S., and Japan, the consultants say. These regions will account for 68% of total demand this year.
However, over the past decade, the study notes, there has been a definite globalization of the industry. The reason is simple: Leading F&F manufacturers are following key end users such as food processors and detergent producers to these regions. Expansion activity in China and Brazil has been especially strong, the study points out, with production showing particular growth in countries such as Spain, Ireland, and Mexico.
According to the Freedonia study, growth in demand for essential oils and natural extracts will outpace that for synthetic aroma chemicals over the next several years.
Flavor blends will continue to be the largest product segment. Blends should show strong gains in developing countries, which are increasing their consumption of products such as fast foods, soft drinks, and snacks. However, in developed markets, growth is being hindered by a variety of factors: consolidation in the food-processing industry, strong downward price pressure from end users, and strong growth in products such as "near waters"--flavored mineral waters that use less flavor than the traditional carbonated drinks they replace.