Agfa lays plans for independent future following Bayer’s divestiture decision

Company welcomes chance to go it alone after decades as subsidiary

Executives at film and PACS vendor Agfa are preparing for a future as an independent company after parent firm Bayer announced that it is planning to spin off Agfa as a stand-alone business in 1999. Agfa executives believe the divestiture will help their company grow more quickly by removing a layer of management and by helping the firm develop a more entrepreneurial focus.

Bayer announced on Sept. 17 that it plans to spin off Agfa by selling as much as 75% of its shares in Agfa on the public markets in the second quarter of next year. Bayer plans to retain a large minority stake in Agfa, the size of which will probably depend on the health of the financial markets at the time of the initial public offering.

Bayer’s move puts an end to several years of speculation regarding Agfa’s position in Bayer’s corporate portfolio. Bayer, of Leverkusen, Germany, acquired an ownership stake in Agfa, of Mortsel, Belgium, some three decades ago. At the time, the acquisition made sense: As a film company, Agfa relied heavily on the types of industrial chemicals produced by Bayer, and Bayer supplied many of the dyes and photofinishing chemicals that Agfa used in its film products and processes.

The rise of digital imaging technologies prompted a drift, however. While Agfa still participates in the consumer and medical film markets, it has established strong positions in digital imaging segments like graphics and PACS. These businesses have less synergy with Bayer’s chemicals, pharmaceuticals, and in vitro diagnostics businesses, according to John Glass, senior vice president of Agfa’s Technical Imaging division in Ridgefield Park, NJ.

“We are transitioning quickly from an analog business to a digital business. Bayer is not a software company, and they don’t understand software,” Glass said. “(The spin-off) allows Bayer to reinvest in the areas that it considers more strategic for its core businesses, those being chemicals and pharmaceuticals.”

Bayer’s strategy was evident in its timing for the Agfa announcement. At the same time that it announced the spin-off, Bayer executives disclosed a plan to acquire biotechnology firm Chiron for $1.1 billion. The move was seen by industry analysts as an attempt by Bayer to catch up to its rivals in the rapidly consolidating pharmaceuticals and diagnostics markets.

The disparity between Agfa’s and Bayer’s core businesses became a source of tension between the companies in recent years. On several occasions in 1995 and 1996, Bayer chairman Manfred Schneider exasperated Agfa executives by publicly raising the possibility that Bayer might sell or spin off Agfa (SCAN 9/11/96). In addition to the lack of synergy between the companies, Schneider found fault with Agfa’s profit margins, which were 3% of revenues.

Agfa subsequently improved its profitability through restructuring efforts, and the rumors about a divestiture died down. This month’s announcement, however, indicates that spinning off Agfa remained on Bayer’s corporate agenda. A sale of Agfa was not likely, due to probable opposition from antitrust authorities in the U.S. and Europe.

Agfa executives welcomed the spin-off announcement. A divestiture will finally clear up nagging rumors about Agfa’s long-term future, according to Glass. An independent Agfa also will have more control over its own destiny. It will be able to move more quickly in making acquisitions to add to its businesses.

“You will see an organization with ambitious growth plans,” he said. “We will have the flexibility to initiate that growth more effectively than we’ve had under the Bayer umbrella.”

As an independent company, Agfa will have three major business units: graphics, consumer film, and technical imaging, a catchall category that includes markets such as medical, nondestructive testing, and movie film. Medical is the largest segment of the technical imaging division, Glass said. Agfa’s revenues were $4.76 billion last year, with operating profit of $283 million. That’s a return on sales of about 6%, reflecting the success of the company’s restructuring effort in doubling its profit margin.

In the x-ray film market, Agfa holds down the number-two market-share position worldwide, behind Eastman Kodak of Rochester, NY. In the U.S., Agfa is the third largest film vendor, behind Kodak and Sterling Diagnostic Imaging of Greenville, SC.

Agfa has a major head start over other film companies in the PACS business, however, where it is considered the leading vendor. The company has installed numerous PACS networks at private-sector hospitals and is one of two competitors in the U.S. military’s Digital Imaging Network-Picture Archiving and Communications Systems (DIN-PACS) project. In the bidding for DIN-PACS awards, Agfa’s consortium has been outshone by the team led by IBM, but Agfa should reap benefits from DIN-PACS in years to come as the military begins investing in digital imaging technology.

Some of the challenges facing an independent Agfa will involve its consumer film business, considered the weakest side in the company’s triangle of core businesses. Agfa’s consumer film products do not enjoy the cachet of Kodak or Fuji products in most areas of the world.

The Bayer/Agfa split invites comparisons with Imation of Oakdale, MN, which was spun off by parent 3M in 1996. Imation has found the going tough as an independent company: Profitability problems led to a restructuring implemented earlier this year, followed several months later by the announcement that Imation would exit healthcare by selling its medical imaging business to Kodak (SCAN 8/19/98).

There are some fundamental differences between Agfa and Imation, however. For one thing, Agfa is twice the size of Imation and is posting healthy profits, according to Richard Howell, a former Agfa executive who now runs the Howell Group, a medical technology consulting firm in Gilroy, CA.

“It’s unwise to compare this to Imation,” he said. “The health and the size of the photography business of Agfa doesn’t compare with Imation. In terms of medical, the amount of business at Agfa is also much larger.”