Spinning the speculation carousel. 💸

The outlook is very bleak for Germany’s energy-intensive industry, but there’s one company in the sector whose decline really bothers me the most. That’s why I think it could soon be acquired, given its now-low market capitalization.

I’d like to outline a few plausible reasons why I think this and why I generally believe it’s significantly undervalued.

The company in question is Lanxess $LXS (-1.24%) .

Lanxess was the spin-off of the plastics division of the Bayer Group. It has been listed independently on the stock exchange since 2005.

It has evolved from a struggling subsidiary into a successful and highly competitive company with enormous potential for future growth.

Here are a few reasons why the stock is significantly undervalued.

1. The Market Segment

Broadly speaking, Lanxess is part of the chemical industry, yet this sector includes segments with margins just as strong as those in which Lanxess operates.

The company supplies the key segments of:

• High-Performance Materials, including synthetic rubber and advanced intermediates
• Specialty Additives
• Consumer Products

The fact is: You come into contact with products from Lanxess’s brand portfolio every day.

Here are a few examples:

• Kalaguard – preservatives for hygiene products and cosmetics
• Lewatit – ion exchange resins for water treatment in both small- and large-scale applications (such resins are typically found in every household appliance that uses water, such as dishwashers)
• Mesamoll – a plasticizer for plastics. Found primarily in durable applications, such as waterbeds, and thus high-margin—or, for the consumer, “expensive.”
• Saltidin – the active ingredient par excellence for “mosquito or tick sprays”
• Oxone – the chlorine-free pool cleaner for your home swimming pool.

Net margins of ~15% are not uncommon here; in fact, they’re more like the average.

2. Competition

In most segments of its chemical products, Lanxess is either the market leader or is clearly competing head-to-head with the market leader, BASF $BAS (-0.29%) and challenges the Ludwigshafen-based company right down to its very core.

3. Production Sites

Lanxess is also globally diversified in its choice of locations and is thus linked to different markets in terms of its cost structure. A decline in the German production sites would, roughly speaking, be devastating, but not the end of the company.

However, it must be acknowledged that most of the sites in Germany have definitely already paid for themselves and therefore represent the group’s cash cow. In the current situation, too many factors are converging.

• The decline in consumer spending
• High costs and, in some cases, bankruptcies among downstream manufacturers
• Competitive pressure
• The European market being flooded with Asian products

4. Management

Lanxess’s management under Matthias Zachert is definitely a role model for the German industrial landscape. It identifies promising market opportunities early on and strategically steers the group toward high-margin niches while keeping spending within reasonable limits.

It is no coincidence that Buffett also holds a 5% stake in the company.

5. Takeover Theory

The following, of course, reflects only my own thoughts and is therefore pure speculation.

Since the stock market crash of 2022, German industrial stocks have failed to recover. The current economic environment is simply too poor. There is a complete lack of political support measures. Various industry associations are increasingly criticizing the federal government’s economic policy, whereas state governments have already recognized the gravity of the situation and are pledging binding support to companies.

Even during the Covestro takeover bid, it was clear that foreign investors were keeping a close eye on German industry to take advantage of the low stock prices.

Another likely example, given its unique brand portfolio, is Lanxess.

The company’s enterprise value is expected to be valued at just under €5 billion in 2023, while revenue prospects continue to rise. Its market capitalization, however, is currently valued at just under €2 billion. However, a takeover offer of approximately €5 billion is estimated to be acceptable. The second factor, on the other hand, will be up to management, but with the right offer, they certainly wouldn’t turn it down.  

But who would be interested in this?

It’s reasonable to assume that other Middle Eastern emirates and funds will launch a major push into Europe—and Germany in particular—to expand their economic and political influence here and accelerate the shift away from oil. With a sustainable portfolio like Lanxess’s, this would be an ideal complement.

But U.S. corporations, such as Dow $DOW (-0.93%) or DuPont $DD (-2.27%) could boost their dominance in the plastics markets and incorporate the innovative strength of the German chemical industry into their corporate structure. Antitrust concerns raised by competitors, however, would pose a challenge. Yet even here, workarounds could be found through equity investments or concessions to competitors, similar to the Linde $LIN (+0.11%) -Praxair merger.

What do you think about this?