Andrew Teare is in the business of metamorphosis: in five years he has transformed ECC from a traditional extractive industry to an international speciality chemicals 'chain'. But the market is still not totally convinced.
There was one thing Andrew Teare particularly wanted to know at the getting-to-know-you-dinner. 'Tell me,' he asked Lord Chilver, chairman of ECC, and Chilver's fellow non-executive directors, 'is this company lean and mean?' The directors fell off their chairs laughing.
Teare smiles as he recalls the meeting. It was only five years ago, yet in corporate culture terms it took place in another era. In the intervening half-decade, the venerable ECC - founded in 1919 by the merger of three big china clay companies - has been changed by Teare and an almost completely new boardroom team out of all recognition. About the only constant factor is kaolin, the china clay that makes paper white and which, along with calcium carbonate, is the group's core activity. And that is being transformed from a production-led business to one where the accent is on value-added innovation and customer service.
Apart from kaolin, everything - from the company's business portfolio to the location of its headquarters - is different. So is its name, with ECC discarded in favour of the company's original title of English China Clays. That is the only area where Teare has turned back the clock. He was head-hunted, aged 47, from Rugby Group, where he had also engineered a corporate metamorphosis - from also-ran cement company into dynamic building materials business. Many people assumed that he would take a similar route with ECC: expanding its building materials operations on the foundation of its china clay interests. But Teare confounded their expectations.
Five years ago ECC looked very different. According to the American Securities and Exchange Commission - for historic reasons, ECC has a New York stock-market quote - it was 'primarily engaged in the production and worldwide sales of kaolin, calcium carbonate, ball clay and other industrial mineral products and in the production and sale of construction materials and aggregates. The group is also engaged in housebuilding and the sale of specialised drilling fluids and services to the oil and gas industries.' It was a classic 1980s story: a group with strong local roots and an international presence thanks to its core business, but which had grown upwards and outwards on the back of the Lawson consumer boom. Like other construction industry firms, it had also got fat. 'By late 1989, most companies had been through a fairly aggressive renewal of their management process,' says Teare. 'This company really had not.' Underlying decline had already set in. With its relative market worth on the slide, ECC had just lost its long-standing place in the FT-SE 100 Index. Teare scented trouble: 'There was a crisis brewing, but ECC didn't go to the wall because we acted quickly enough.' Even before he got his feet under the desk, Teare had decided that housebuilding should go. 'Housebuilding was an easy decision, an obvious move,' he says. 'We had three businesses all of which wanted capital on a continuous basis. If we tried to satisfy them all, we couldn't do a decent job on any one of them. And if we starved them, we had a problem.' ECC thought that it could be free of housebuilding in three years. But five years on, the group still has some housebuilding assets on its books. It has so far realised £150 million from winding down the division, and hopes to raise another £50 million from the residue - making a total slightly less than its original target of more than £200 million.
Selling housebuilding was only the start of his shake-up. Like Sir Christopher Lewinton and the late Ronnie Utiger, whose turnround of TI Group has certain similarities with Teare's ECC reformation, he believed that moving head office was essential to break the entrenched corporate mind-set. ECC's headquarters since time immemorial had been right over the shop: an ocean-liner-like building called John Keay House, perched on the cliffs in St Austell, close to the huge quarry source of the china clay.
Teare closed the offices down and moved ECC to a business park outside Reading, streamlining the size of the central staff in the process. The move was symbolic as well as physical: 'It stated that the business was setting itself up to be a truly international group with operations in Britain, America, and the Pacific,' Teare says. 'And it made clear that nothing was going to be the same, because real change was happening.' Much the same message was delivered to ECC's corner-stone, the Cornwall kaolin operation. Teare cut its 5,000-plus workforce by almost 25% over a period, to its present 3,800. 'It hasn't been easy for anyone involved, because there are not that many employment opportunities in that part of the country,' Teare says. 'But we were overmanned, and it's a business which sells so much overseas that you cannot export UK costs and inflation.' Over time, he also stripped away further vestiges of ECC's relatively unfocused past: a 29% stake in Bryant, the housebuilder, and a series of other peripheral activities which in total realised £110 million. Hand in hand with the retrenchment went a huge enlargement of the china clays core. Here, Teare had a stroke of good fortune.
For years, ECC had wanted to buy one of the big American china clay players, which are concentrated in Georgia. The last act of his predecessor, Stan Dennison, was to fulfil that ambition by agreeing to pay Asea Brown Boveri, (ABB) the Swedish-Swiss power engineering giant, $520 million (£310 million at prevailing exchange rates) for Georgia Kaolin, the biggest of the American china clay companies.
Dennison's was a brave deal, since it pushed debt gearing through the roof and was executed in the face of both a weakening paper market which was cutting Kaolin's 1990 profits, and ECC's own falling share price. Teare blanched at the purchase price, which was high even for a strategic acquisition. Luckily for him, the deal was dragged into a Justice Department investigation and found to be anti-trust in its original form. It had to be revised, and ECC took the opportunity to renegotiate. Just before Christmas 1990, it paid $340 million (£178 million, since sterling had risen against the dollar) for Kaolin, shorn of several pieces. Effectively, ECC paid two-thirds of the original asking price for about 80% of the company.
The deal established ECC beyond all doubt as the world's leading china clay producer, but that began to look like a double-edged sword as the world paper industry sank into recession. Teare was relatively relaxed: 'The paper cycle is a pricing cycle which tends to squeeze margins, but there isn't a savage volume cycle in this industry, unlike others. Even at the worst times, you can enjoy volume growth.' This time, however, there was one big difference from every previous downturn. The paper industry recession did not end. 'The downturn lasted two years longer than ever before,' Teare says. 'So from 1992 to 1994, when we thought we had got everything going, with the cost base restructured and the market improving, we had two very difficult years.' But the unprecedented duration of the paper recession also crystallised Teare's and his team's restructuring strategy. 'In 1992, we started really thinking about how we would reshape the business portfolio,' says Teare. After Kaolin, ECC would have been prevented by the competition authorities from going much further in its core business (although further acquisitions in calcium carbonate might have been possible). In any case, Teare believed the world was changing, and that ECC had to change with it. By the time of Chilver's annual statement in 1993, ECC felt sufficiently confident about its reorientation to announce that it would expand 'in areas of high scientific and technical competence, with strong research and development and proprietary knowledge.' What Chilver did not say is that Teare and his team had already made up their minds about precisely where they were going.
ECC's Big Bang came on 11 June 1993. The company announced that it planned to divest its building materials division - the group's second largest operation - and was buying an American speciality chemicals business called Calgon from the US drugs leviathan Merck for $307.5 million (£202 million), partly funded by a £113 million rights issue. Despite the cash call, the share price actually rose - signifying City endorsement of the radical departure from ECC's historic line of development.
Teare, finance director Patrick Drayton - who had joined from Schroders the previous year - and Trevor Sharland - an ECC veteran who was to take command of speciality chemicals - had concluded that ECC's growth prospects were distinctly limited - unless it dared to break the corporate mould. At stake also, whether they knew it or not, was the company's independence: both RTZ - the British metals and resources giant that was runner-up to ECC in the bidding for Kaolin - and Hanson are believed by analysts to have cast their eye over the group.
The negative rationale for hiving off the aggregates side of the business was twofold: even with the withdrawal from housebuilding, ECC could not afford its two main businesses because they were both capital-demanding and cyclical. More positively, by getting rid of aggregates, Teare says, 'you could get a more flexible capital structure, create an opportunity to spread the geographic balance further, and really upgrade paper sciences.' On the solid foundation of its world leadership in china clays, ECC was to springboard into a knowledge-based, value-added, service-orientated - and, crucially, higher-margin business. And Calgon was to be its cornerstone.
As a first step into speciality chemicals, Calgon made a lot of sense. Its technical base, water-soluble polymers, was well known to ECC. The paper companies supplied by ECC with minerals are among the biggest customers for its portfolio of water management chemicals and services - such as systems to analyse water quality, paper chemicals, biocides, ingredients for cosmetics and ceramics, paints and polymers manufacture. But Calgon was more than 80% concentrated on US sales; Teare planned to piggy-back its products and services onto ECC's worldwide china clays customer base.
The City's positive reaction was, to some extent, surprising. Fund managers are notoriously cautious, yet here was a group abandoning a business it had been in for decades and diversifying into the relative unknown. Such a move ran contrary to the prevailing corporate vogue of reversing past diversification and focusing on long-standing core businesses. Moreover, ECC was embarking on this untried and untested course through an acquisition in America - the notorious graveyard of many a British group which believed it could translate its managerial expertise to the other side of the Atlantic.
Teare and his team, however, had few doubts. Once they had decided to aim at the water-soluble polymers area of speciality chemicals, their short-list of seven potential targets led them straight to the US where almost all the companies operated. Teare also argues that Calgon was not an outright diversification: 'It was an extension of our business, because it is all to do with the management of fine particle materials, liquid or solid.' It was still a bold move. Indeed, in its novelty and the determination of its execution - ECC had to fight off several rival bidders for Calgon - it embodied two of Teare's great strengths. 'Andrew has flair, and he is very decisive,' says one industrialist who knows him well. Calgon was no world-beater - it was number three in the US market with a market share of about 8%, against the 20% held by its two larger rivals, Nalco and Betz. Its margins were lower than either of theirs. And only 17% of its £1 50 million-plus annual sales were outside America. For Teare, all these weaknesses were sources of opportunity.
The rights issue and the parallel divestment of building materials also demonstrated his readiness to invert convention. The obvious course was to finance the Calgon purchase by selling aggregates through an auction process. Instead, Teare opted for the rights issue and made it plain that he favoured demerging aggregates, giving it to ECC's shareholders as a new public company.
Teare had sound practical reasons for choosing this course: 'The danger of putting it up for sale was to create a demotivated management and eventually to become a forced seller. By demerging it, we incentivised management to really get in and set the business up. And we could choose when to float it, because we were in control of the timetable.' It was neat and it worked. Camas, as the division was named, was demerged in June last year. Fourteen months later, it has a market value of £235 million. What ECC had taken from shareholders with one hand, it had returned with interest on the other. 'We made the company smaller, but we also made it stronger,' says Teare. 'And we gave shareholders a choice: minerals or construction. Generally, they have liked that.' Shareholders have no reason to complain: the Teare chemistry has delivered a satisfactory return for investors. On the eve of his appointment, ECC shares were 358p. At the end of August they stood at 388p. Adding the 77p value of Camas, that gives a combined total of 465p. 'The shareholders have stayed with us,' says Teare. 'We talked to them fairly early on and said, "This company needs pretty major surgery". They all said, "Thank God someone is going to do it".' Now, Teare is confidently holding out the prospect of long-term growth. Calgon, and the $45.3 million (£28 million) follow-up purchase in October of EZE, a speciality chemicals supplier to the paper and surface treatment industries in America, are first steps in what Teare, Drayton and the team see as a speciality chemicals 'chain'.
'The whole field of speciality chemicals in products and services is a massive spider's web, because the core technologies can be applied across a range of industries,' says Teare. If he is right, and ECC can deliver the goods, one day chemicals will account for perhaps half the group's (enlarged) business, rather than its present, modest 20%. And at the same time, the upgrading of the minerals business proceeds relentlessly. 'Five years ago, if you had gone to visit Cornwall, you would have been taken to see a giant hole in the ground and a bulldozer,' says Teare. 'All the talk would have been about how much the bulldozer cost and how large the hole was. If you go today, you are taken to see a laboratory and shown how we are devising new treatments for coated clays. As for the hole, you might look at a picture of it.' As a result, ECC is pressing the Stock Exchange for a change in classification. It wants to be removed from the 'extractive industries' sector and promoted to the 'chemicals' bracket, which normally carries a higher rating. 'Only 15% of the company's cost base is now related to extractive activities,' argues Teare.
ECC's earnings last year - £93 million pre-tax, on sales of just over £1 billion - may have been slightly lower than those of five years earlier - £100 million pre-tax on sales of £1.25 billion - but they are undoubtedly of higher quality. However, as analysts point out, Calgon alone has a long way to go to justify ECC's investment. Louise Hough of SBC Warburg forecasts that it will make about £18 million operating profit this year. That is a slim return on the £200 million-plus purchase price, let alone the price combined with the costs ECC has incurred in raising Calgon's margins.
Teare, while maintaining that Calgon has 'worked out extremely well', nevertheless admits to certain setbacks. Water treatment, by far the largest segment of Calgon's business with more than two-thirds of its sales in 1993, had been growing at an annual rate of 8%-10% compound, but since ECC bought Calgon the sector has gone flat or even declined. 'That has not been helpful,' says Teare. As a result, Calgon, 'hasn't yet developed the sort of returns we want to see come from it'. And speciality chemicals as a whole needs an acquisition or two in Europe, where it is almost non-existent. 'Gradually adding to Calgon for the critical mass we really want is going to be quite a long game,' says Teare. 'We have to be patient, because trying to force deals makes them very expensive.' The paper business has picked up, and ECC is getting some price rises through, but paper companies are working hard to substitute calcium carbonate for the premium-price kaolin. ECC will still benefit from volume rises, but its selling margins will be under pressure. Prices will be further restrained by new kaolin deposits found in Brazil's Amazon basin.
The combination of all these factors leads some analysts to the inescapable conclusion that ECC shares are over-rated. But that view takes no account of the Teare factor. That will last as long as the transubstantiation of English China Clays appears to be reaching fulfilment.
Andrew Lorenz is business editor of the Sunday Times.