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Disruption in the European Laminate Industry
June 8, 2004 |Estimated reading time: 7 minutes
PCB-NETWORKBusiness Development
by Hans J. Friedrichkeit
Disruption in the European Laminate Industry
What Isola has in common with Burger King, Continental Airlines and Berliner Bankgesellschaft
It's been an eventful 18 months in the European laminate industry. Three manufacturers bankrupt and the world market leader, Isola AG, put up for sale by its parent Ruhrkohle AG (RAG). Is the crisis of the last three years finally taking its toll, or is this simply the long-overdue market shakeout, with which the Europeans, in the eyes of Americans and Asians, have so many problems?
The first to suffer was AIK Group in Kassel, Germany, in the fall of 2002, a relic of the once-proud AEG empire. AIK Lamainate was sold off by the insolvent AEG at the beginning of the nineties as a management buy-out (MBO). Three Philips in-house circuit board manufacturers - in Sittard (Netherlands), Klagenfurt (Austria), and Croydon (UK) - followed soon after to complete AIK Group. They had tried to develop a market niche in a field they knew - paper laminates. In spite of a highly promising start, the situation deteriorated as demand for singlesided PCBs and non-plated-through-hole (CNPTH) double-sided PCBs fell. Entertainment electronics production dwindled and white goods manufacturing drifted out of Europe, marking the beginning of a gradual decline into bankruptcy and liquidation.
The next to go in the laminate industry was Dielektra in Cologne, Germany. The company initially emerged from Felten & Guilleaume as the result of a management buy-in (MBI) by Norplex managers at the beginning of the eighties, and proceeded to change ownership several times. After joining the Swiss Von Roll group in 1989 and undergoing a management buy-out in 1994, Dielektra was sold to the American Park Electrochemical Corp. (Nelco) in October 1997. Park was particularly interested in gaining direct access to the European market and Dielektra's special production technology. Yet this was not the happiest acquisition for Park Electrochemical Corp. (Nelco). Having to contend with global players like Isola, Polyclad and world leadership challenger Nanya as well as a gradual price collapse, the company quickly started to record growing losses. Waves of redundancy followed. On February 4, 2004, the parent stepped on the emergency brakes, rejected a further loss adjustment, and filed for insolvency soon after. Park Electrochemical Corp. now directs its European operations from its offices in France. The third company to feel the heat was Italian Piad, in March 2004, another base material manufacturer for whom things had grown steadily quieter in recent years. Falling prices accompanied by the rising cost of copper, glass fabric and epoxy resin have left the owners, the Brunoldi family, with no choice. In the industry, word has it that the plant is closing.
Isola AG: And now to the common factor linking Burger King, Continental Airlines, Berliner Bankgesellschaft and Isola. They have either been targeted by Texas Pacific, a private equity fund from Fort Worth, Texas, or have been acquired and restructured by this group.
Texas Pacific teamed up with Redfern Partners, a strategic investor in the PCB industry from Lake Forest, California, to initiate the joint takeover of Isola AG on April 1, a move that astounded experts.
Strategic reasons - the purchase of Degussa - and the considerable losses made by Isola were behind the decision by Ruhrkohle AG (RAG) to put the company up for sale in March 2003. Several investors were interested in Isola, and even Chinabased Kingboard, itself a large laminate manufacturer, was supposed to have been in talks. However, after over a year of uncertainty, the deal is finally set to be closed on May 31, 2004, and Isola is under new ownership as of June 1.
New Management and Headquarters: The new owners have changed the top management immediately. Raymond P. Sharpe former CEO of Cookson Electronics has been appointed new Chief Executive Officer of ISOLA Gmbh on June 3. Sharpe replaces Michael Kowalski. Also Dr. Peter Gaydoul and the other members of the Board of Directors will leave ISOLA according to reliable sources. According to these sources Augusto Meozzi has been named VP Europe. The Headquarter of ISOLA has been transferred from Dueren/Germany to the former US HQ of ISOLA in Chandler (Phoenix) Arizona.
Fig. 1 - ISOLA AG: Sales and Pre Tax profit in Mio. EURO
Who are Redfern Partners + Texas Pacific?
But who are Redfern Partners and Texas Pacific, apart from a strategic investor in the PCB industry from Lake Forest, California, and a leading US private equity fund from Fort Worth, Texas? The initial response of many industry insiders was to wonder whether this was going to be a re-run of the Viasystems story of 1996. Back then it was the Mills brothers who were the strategic investors, with Hicks, Muse, Tate & Partners as financial investors, and together they created the largest PCB manufacturer in the world.
Armed with a billion dollars and deep pockets, they went on a global shopping spree for PCB companies. This set alarm bells ringing in the European industry and suppliers became intimately acquainted with their special procurement methods. The rest of this consortium's story, i.e. its path to Chapter 11 (insolvency), is familiar enough.
The situation with Redfern and Texas Pacific is somewhat different. Let's consider Redfern Partners first, a company established by Tim and Don Redfern. Tim Redfern is president of Insulectro, the world's largest distributor of multilayer materials focusing on the US market. Its product portfolio encompasses photoresists (DuPont), copper-clad laminates (Gould), electroplating chemistries (Atotech), and backup and entry materials. Insulectro is less well-known in Europe. Since March 2002, it has been a partial owner of CCI Eurolam. Most importantly, however, Insulectro is also a distributor of Isola materials to the North American market. In other words, the new partial owner of Isola is actually an "old acquaintance". A distributor buying its former customer is faintly reminiscent of the tale of David and Goliath.
Texas Pacific, a real finance and turnaround investment heavyweight, today manages an 8-billion dollar portfolio. Texas Pacific was founded in 1993 by David Bondermann, a lawyer with extensive experience in turnarounds, and James Coulter, a leading Lehman Brothers banker. Shortly afterwards, they welcomed on board William Price, a consultant who had worked for GE Capital and Bain & Company. As the New York Times put it in 2002, Texas Pacific buys "businesses no one else wants" and brings them back into the black. Its more famous success stories include the once-bankrupt airlines Continental Airlines and America
West. In 1996, the company invested $280 million in Italian motorcycle manufacturer Ducati and successfully turned it around. But it has also had its disappointments, such as the purchase of Swiss shoe company Bally in 1999. In the semiconductor industry, Texas Pacific bought Zilog in 1998 for $400 million and lost everything through bankruptcy. In November 2001, it bought MEMC Electronic Materials from Düsseldorf-based EON and is now making profits again. In its acquisitions, Texas Pacific does not get involved in the operational side of the business at all. Instead, it works out a restructuring plan, then strictly monitors its execution and results. If there are any weaknesses at management level, it uses its many contacts to bring in replacements. Doubtless, its approach also involves the provision of money for new investments. In spite of high losses (Fig. 1) in recent years, Isola's prospects are not bad. With a booming laminates market with contingents in Asia and lengthening delivery times, as well as rising prices in Europe, the company is in a good position. More importantly, however, it is now free of its strongly political and trade union-oriented coal-producing parent, Ruhrkohle AG. Restructuring owners like the two partners will quickly introduce tough measures to eliminate loss makers as soon as any contractual blocking periods have expired. At the same time, they will invest in the new growth markets of south-east Asia. Provided the management is committed to this new, strictly business-oriented approach and to realigning itself with a minimum of delay, Isola will soon recover its lost sparkle.
Fig. 2 - Concentration of the European Laminate Industry
In summary:
- The base materials market is booming. There are contingents in Asia, and even in Europe, the question may soon cease to be "how much will it cost?" but "can you deliver?"
- Isola will be the only producer left in the rigid materials market in Europe if Piad finally closes. However, distributors with their own panel-cutting facilities such as Technolam (which distributes Nanya products) will soon close this gap.
- More production capacities will move to Asia and the position of the European laminates market will continue to decline in the coming years, i.e. the number of laminate production facilities quoted in Fig. 2 will shrink further.
- Under its new owners and new top management, Isola will go through a fast restructuring period with an excellent chance to turn its business around.
Hans J. Friedrichkeit is president of PCB-NETWORK located near Basel/Switzerland, a business development, marketing strategies and mergers and acquisitions firm. Friedrichkeit is a former Chief executive of various large Europe-based PCB companies and has worked in the electronics industry in the U.S. and Japan as well. He is board member of various companies and organizations i.e. the Electronica fair and cofounder of Germany's PCB association ZVEI-VDL. He may be reached at Friedrichkeit@pcb-network.com.