Ercros S.A.

Avda Diagonal 595-5a planta
Barcelona, Spain
Telephone: (34) 93 439 30 09
Fax: (34) 93 430 80 73
Web site: http://www.ercros.es

Public Company
Incorporated: 1989
Employees: 972
Sales: EUR 432.8 million ($649 million)(2005)
Stock Exchanges: Madrid
Ticker Symbol: ECR
NAIC: 325998 All Other Miscellaneous Chemical Product Manufacturing; 212393 Other Chemical and Fertilizer Mineral Mining; 325131 Inorganic Dye and Pigment Manufacturing; 325181 Alkalies and Chlorine Manufacturing; 325192 Cyclic Crude and Intermediate Manufacturing; 325320 Pesticide and Other Agricultural Chemical Manufacturing; 325412 Pharmaceutical Preparation Manufacturing; 424590 Other Farm Product Raw Material Merchant Wholesalers; 424690 Other Chemical and Allied Products Merchant Wholesalers

One of Spain's leading independent chemical producers, Ercros S.A. ranks among the country's top chemical companies overall. Ercros operates through six major divisions. Basic Chemicals produces chlorine, ethyl acetate, caustic soda, sodium hypchlorite, sodium chlorate, and caustic potash. Through this division, the company is the largest producer of caustic soda in Spain, with a 37 percent market share; the leading Spanish producer and second-larger European producer of ethyl acetate, holding 32 percent of the domestic market and 17 percent of the European market; and the sole Spanish producer of caustic potash and potassium carbonate, giving the company 80 percent of the Spanish market for both chemicals. Basic Chemicals, which operates from seven factories in Spain, is Ercros' largest division, accounting for more than half of the group's annual sales. Plastics, the company's second largest division, is Spain's number two producer of PVC, and also produces vinyl chloride monomer in two factories. Much of the company's plastics output is destined for the export market. Pharmaceuticals, which represents 7 percent of company sales, produces erythromycins, phosphomycin, and statins, and other basic and intermediary compounds for the pharmaceuticals industry. The company leads the world in production of phosphomycin, with an 80 percent share of the global market, and is also the second-largest producer of erythromycin base, salts and derivatives, with a 10 percent share of the global market.

Ercros's Animal Food division produces phosphates for the feed industry, and also operates two facilities producing plant health products for the agricultural sector. Some 90 percent of the group's animal phosphates are sold in Spain. The company's Emulsion division operates from a factory in Germany and chiefly produces stryrene acrylic, and vinyl and acrylic emulsions for the German market. Ercros's final division is its Water Treatment division, which manufactures water treatment chemicals for swimming pools, as well as for detergents, bleaches and cleaning products.

Ercros is listed on the Madrid Stock Exchange, and is led by Chairman and CEO Antonio Zabalza Martí. The company's revenues neared EUR 433 million ($649 million) in 2005. The integration of Derivados Forestal Group, purchased in March 2006, is expected to add more than EUR 200 million to the group's turnover by the end of the year.

MERGING SPANISH CHEMICAL COMPANIES IN 1989

Ercros group was created in 1989 through the merger of two chemical companies, SA Cros and Unión Explosivos Rio Tinto S.A. (ERT). Both companies had been active in one form or another for more than one hundred years. In Cros' case, the company was founded by Francisco Cros, who began producing fertilizers in Barcelona in 1817. The company remained in the Cros family hands, coming under the leadership of Amadeo Cros at the turn of the 20th century.

The younger Cros eyed expansion and diversification into the broader chemicals field, and in 1904 the company was incorporated as SA Cros. In that year, Cros also reached an agreement with Sociedad Electro-química de Flix to act as the exclusive distributor for Flix's production of chlorine and soda. Flix had been established in 1897 through a consortium of Swiss, German and Spanish investors, who built a production unit on the Ebro River in Tarragona. That factory became one of the first in Europe to use electricity in the production of chlorine.

The relationship between the Flix factory and Cros remained a lasting one and gradually deepened. Following World War II, Flix incorporated as a limited liability company, and Cros became its majority shareholder. By 1974, Cros had absorbed Flix fully. By then, Flix had developed into one of Spain's leading producers of chlorine and caustic soda, as well as chlorine derivatives, chlorinated solvents and dicalcium phosphate. Into the 1980s, Cros had grown into one of Spain's largest nongovernment owned chemicals concerns, a position the company solidified with its acquisition of a majority stake in ERT in 1987.

ERT had been founded in 1872 as Sociedad Española de la Pólvora Dinamita in Bilbao. That company was created as part of the network of dynamite production companies established by Alfred Nobel and his family following Nobel's invention of dynamite in 1867. The Polvora company, established in partnership with a group of French and Belgian investors and registered in France, built a factory in Galdácano in order to replace a factory on the other side of the French-Spanish border.

That factory enjoyed a five-year period as the exclusive producer of dynamite in Spain, a monopoly granted by King Amadeo I. The headstart enabled Polvora to weather early competition in the late 1870s, when the exclusivity term expired. Much of this competition came from outside Spain, particularly from Germany and Scotland, including other members of the Nobel network. In 1887, however, the company faced the appearance of a domestic rival, Sociedad Española de la Dinamita, which took over the Galádacano site in 1896. The Polvora company was later renamed as Sociedad Anima Española de la Dinamita y de Productos Quimicos, before being merged into the Sociedad Española de la Dinamita in the late 1960s.

Sociedad Española de la Dinamita branched out into the production of fertilizer in 1927 with the purchase of Sociedad General de Industria y Comercio, based in Cartagena. That company had launched fertilizer manufacturing operations in 1903, building a factory in El Hondón. The purchase of the Cartagena operation also brought mining rights for potassium salt in Cardona. Mining began in 1929 and remained part of the company's operations through the end of the 1980s. The explosives producer continued to grow in the second half of the century, especially through its merger with Compañia Española de Minas de Rio Tinto, a company established in 1954. The newly enlarged company then took on the name Unión Explosivos Rio Tinto S.A. (ERT).

COMPANY PERSPECTIVES

Ercros' mission is to consolidate a sound and sustainable industrial project that contributes to the community's wealth and well-being, pays back the trust its shareholders have placed in it and gives those working for it the chance to develop their personal and professional potential to the full. Ercros' operations are designed to increase the company's value and are guided by three basic principles: the highest possible safety standards to protect employees, the local community and facilities; absolute respect for the environment; and complete product quality and satisfaction of customers' needs.

ERT continued growing through the 1970s. In 1974, for example, the company acquired Compañía Española de Penicilina y Antibióticos (Cepa), which had launched production of antibiotics and antibiotic base materials in 1949. Cepa became the first Spanish company to produce antibiotics, launching production at a factory in Aranjuez in 1951. In the late 1960s, Cepa teamed up with Merck to develop a new antibiotic, phosphomycin, launched in 1968. The company remained the world's leading producer of phosphomycin into the 2000s.

In 1973, ERT launched production at a new chemicals facility built at the new petrochemicals industrial zone opened by the Spanish government in Tarragona. ERT's facility produced nitric acid, then added a second facility for the production of ethyl acetate. At the same time, ERT became a founding member of the Industrias Quimicas Asociadas (IQA) joint venture, which built a number of production plants near ERT's Tarragona operations. IQA then established a subsidiary, SA Explosivos Total Aquitaine (SAETA), which launched production of low density polyethylene in the mid-1970s and became the central production plant in the Tarragona zone, with ERT's own operations providing support services. IQA also set up plants producing acetaldehyde and acetic acid in the Tarragona zone. In 1977, ERT bought out its partners, taking full control of SAETA. After IQA went into receivership in the mid-1980s, ERT took over much of IQA's operations.

RESTRUCTURED FOR THE NEW CENTURY

Cros and ERT began transitioning toward their merger in the late 1980s, especially after Cros acquired a majority stake in ERT in 1987. A driving forced behind the merger was the Kuwaiti Investment Office, which, through its subsidiary Grupo Torras, emerged as the newly formed Ercros' majority shareholder, with a 38.6 percent stake.

At its creation, Ercros appeared to be a vibrant new chemicals leader in Spain. Yet the merger quickly turned sour; Ercros' heavy involvement in the production of fertilizer crippled the company into the early 1990s. The Spanish fertilizer market had entered a new phase after the Spanish government liberalized the market in 1986, allowing foreign competitors in for the first time. Spanish fertilizer companies were soon hit by a double blow of oversupply and a flagging economy. In the meantime, extended drought conditions had cut deeply into fertilizer demand. By 1992, Ercros was on the brink of bankruptcy.

KEY DATES

1817:

Francisco Cros begins producing chemicals in Spain.

1872:

The Sociedad Española de la Pólvora Dinamita in Bilbao is founded to produce dynamite.

1887:

The Sociedad Española de la Dinamita is created.

1896:

Sociedad Española de la Dinamita acquires Sociedad Española de la Pólvora Dinamita.

1897:

The Sociedad Electroquímica de Flix is incorporated to produce chlorine and soda.

1904:

Amadeo Cros incorporates his company as SA Cros and acquires exclusive distribution agreement for Flix production.

1927:

The Sociedad Española de la Dinamita acquires the fertilizer producer Sociedad General de Industria y Comercio in Cartagena.

1954:

The Compañia Española de Minas de Rio Tinto is founded.

1969:

The Sociedad Española de la Dinamita merges with Compañia Española de Minas de Rio Tintoto become Unión Explosivos Rio Tinto S.A. (ERT).

1974:

Cros acquires full control of the Flix factory; ERT acquires Compañía Española de Penicilina y Antibióticos (Cepa), a leading producer of phosphomycin.

1989:

Cros and ERT merge, forming Ercros.

1992:

Ercros spins off most of its fertilizer operations into Fertiberia.

1995:

The company sells off majority control of Fertiberia and launches a diversification strategy, focusing on basic chemicals, agricultural, veterinary and feed additives, and pharmaceuticals.

2001:

Ercros begins construction of a new feed phosphate plant.

2005:

Ercros acquires Grupo Aragonesas from Uralita for EUR 180 million.

2006:

Ercros acquires the Derivados Forestales Group.

The difficulties in the fertilizer sector had already led Ercros to close a number of its fertilizer production sites as early as 1990. In the new decade, the company launched a wider restructuring, selling off a number of operations. Such was the fate of its potash mining subsidiary, Potasas de Llobregat, which was spun off into the merger that formed Comercial de Potasas, also known as Coposa, in 1992. The company also shed its Rio Tinto mining operation.

Yet Ercros's fertilizer division, operating as Fesa-Enfersa, remained a heavy weight on the group's operations, dragging the company toward bankruptcy. Ercros appeared to have found a rescuer, in the form of U.S.-based Freeport-McMorRan Inc., which initially agreed to buy up a 55 percent stake in Ercros. Instead, Ercros worked out a deal with Fesa-Enfersa's main creditor, Morocco-based OCP, which spun off Fesa-Enfersa's as-sets into a new company, Fertiberia. In exchange, OCP forgave Ercros its debt. Originally, Fertiberia was to be acquired by Freeport McMorRan for a nominal one-peseta purchase price. Instead, Spanish industrialist Juan Villar Mir stepped in with his own bid for 53 percent of Fesa, which had been restructured as the holding company for Fertiberia. Mir won his bid and took control of this part of Ercros' fertilizer operations in 1995. The company remained active in the production of potassium sulfate, however, through subsidiary Potasas y Derivados. This continued involvement enabled the company to take advantage of the upswing in the fertilizer market in the late 1990s.

Through the late 1990s and into the 2000s, Ercros concentrated on the organic expansion of its diversified operations in order to reduce its reliance on its core basic chemicals business and the cyclical nature of this market. The company targeted a number of areas for growth, especially pharmaceuticals, agricultural chemicals, and veterinary and feed additives. The latter category grew strongly and by 2001 accounted for 23 percent of the group's sales. In the early 2000s, Ercos stepped up its feed additives business, building a new feed phosphates plant in the Valle de Escombreras, near Cartagena. This plant came online in 2004.

By then, however, Ercros had decided that organic development was not providing the company with the growth rate it sought. The company instead began targeting acquisitions for its future expansion. By April 2005, Ercros had spotted its first major acquisition target, launching an offer to acquire Grupo Aragonesas from Uralita. By June of that year, Ercros had completed the deal, paying nearly EUR 180 million for Grupo Aragonesas and its subsidiaries. The purchase instantly boosted Ercros's profile, nearly doubling its revenues, which reached EUR 433 million by the end of 2005.

Following the integration of Aragonesas, Ercros restructured again, regrouping its operations into six main divisions. While basic chemicals remained the company's primary revenue source, Ercros had successfully diversified its operations. The company remained on the lookout for new acquisition opportunities. As a result, in March 2006, the company reached an agreement to acquire Derivados Forestales Group. That company was a major producer of formaldehyde and derivatives, among other chemicals in Spain, with four plants in the Barcelona, Tarragona and Valencia regions. The addition of Derivados Forestales was expected to add nearly EUR 200 million to Ercos' sales by the end of 2006.

PRINCIPAL SUBSIDIARIES

Agrocros S.A.; Aiscondel S.A.; Aragonesas Delsa S.A.; Aragonesas Industria y energia S.A.; Ercros Industrial S.A.; Fosfatos de Cartagena SL; Freihoff Chemie GmbH; Ufesys SL.

PRINCIPAL DIVISIONS

Basic Chemicals; Plastics; Pharmaceuticals; Animal Food; Emulsion; Water Treatment.

PRINCIPAL COMPETITORS

Repsol YPF S.A.; Bayer Hispania S.A.; Dow Chemical Iberica S.L.; BASF Espanola S.A.; Arkema Quimica S.A; PPG Iberica S.A; ICI Espana S.A.; Pavasal Empresa Constructora S.A.; IFF-Benicarlo S.A; Acieroid S.A.

FURTHER READING

Beacham, Will, "Ercros Completes Site Sale," ECN-European Chemical News, May 24, 2004, p. 8.

"C to Buy Chemicals Firm in Spain," Chemical Week, April 20, 2005, p. 5.

Marti, Antonio Zabalza, "Ercros Survives a Fierce Baptism," Fertilizer International, May 2002, p. 14.

Robinson, Simon, "Ercros' First Half Profits up Four-fold," ECN-European Chemical News, August 8, 2005, p. 10.

―――――, "New Spanish Buy," ECN-European Chemical News, April 18, 2005, p. 8.

"Ercros to Build Phosphates Plant in Spain," Chemical Week, February 27, 2002, p. 25.

"State Aid for Newly Reorganised Spanish Chemicals Firm Accepted," European Report, July 24, 1999.