As more and more people work in buildings built with walls of glass,
glass maker Pilkington again ranks an impressive third in the North West top 500.
But, with the company being eyed up by Japan's Nippon Sheet Glass, could 2005 be its last year in the list as a domestic company? Joanne Birtwistle reports
Now firmly back on track, the glassmaker has once more become the subject of takeover talks. Nippon Sheet Glass (NSG), which already owns 20 per cent of Pilkington, made a preliminary takeover approach at the end of October 2005 with a cash offer at 150p per share, valuing the group at around £31.9bn, which Pilkington rejected as too low.
Then on 15 December Pilkington said it had received a verbal proposal of 155p a share in cash followed by a written proposal of 158p a share in cash worth £32.08bn, which it also rejected, stating
"the price still falls short of a level which it would be prepared to recommend".
NSG's market capitalisation stands at around £31bn - half that of Pilkington - and a cash acquisition of Pilkington could be a stretch for the Japanese group, whose UK subsidiary, NGF Europe, is also based in St Helens. But it could well see synergy savings by combining its subsidiary's operations with Pilkington's in the UK.
Stuart Chambers, Pilkington's chief executive, confirmed the situation with Insider before the announcement of the second cash offer was made: "The ball is back in their court and that is the status today. Therefore we are technically under offer according to the Panel rules.
"It's not dead yet, we are still under offer. As and when we have something to announce we'll say it."
Pilkington has undergone a remarkable turnaround over the last ten year. In 2005 it announced half-year pre-tax profits of £399m - a 22 per cent increase on the same period a year earlier - despite difficult market conditions and rising energy costs. This success has partly been down to its ability to pass on additional energy costs to buyers through a surcharge, a method that has been used in North America for the last five years and that was introduced in Europe in November 2004.
Paolo Scaroni was brought in as chief executive in 1997 and is widely credited with restoring company's fortunes with the implementation of a three-stage strategy. Stage one began in 1997 and looked at improving the effectiveness of existing operations. This meant reducing overheads, improving manufacturing performance and making sure the business operated to world-class standards.
But Scaroni left abruptly in 2002 after being called upon by Italian prime minister Silvio Berlusconi to take over the top job at Italian energy incumbent Enel. Stuart Chambers, then head of the building products division, took the helm and continued with the strategy, stage two of which was to generate cash to strengthen the group's finances and reduce its debt levels.
The final stage, which is now being implemented, is to invest in profitable growth opportunities in the group's existing businesses, new products and emerging markets such as Russia, China, India and the Middle East.
"If you go back to the mid-1990s, when we started our restructuring, we now make and sell roughly the same volume of glass with roughly the same top line in sales and we do it with 14,000 fewer people and overheads lower to the tune of £3300m. What were those people and that money doing previously? The answer is it was inefficiency and unnecessary overhead," says Chambers.
Energy efficiency is important for a heavy manufacturer such as Pilkington. The production of float glass and building products particularly uses a lot of energy. Energy accounts for 10 per cent of the group's total costs so any savings or efficiencies that can be eked will have a considerable impact on the bottom line.
Chambers says: "We measure the effectiveness of our process in terms of its energy consumption per ton of glass and that's being improved steadily over many, many years and even more aggressively in the last ten years. Of course energy prices have rocketed since so we continue to do everything we possibly can. Cost effectiveness in an industry like ours is critical to survival never mind success."
Pilkington's roots and headquarters may be in St Helens, but it clear that Chambers sees Pilkington as a global company. Of group sales, only around 20 per cent are in the UK, with half of all sales being made in the rest of Europe and around a third in North America.
"UK manufacturing is a concern," he says. "To a global company like ours, if it becomes more and more effective long term to manufacture elsewhere, then we will manufacture elsewhere.
"Government policy on things like energy is very important. One of the things that hasn't been very helpful in the past is that the UK has led the way with things like climate change levy and some of these other initiatives, which has actually penalised UK manufacturing against continental manufacturing. From our point of view, if that's the case we'll use our German, French and other factories. But for a company that's only UK-based that's pretty penal.
"When it comes to environmental measures, like the emissions trading scheme or climate change, we are active supporters of it. But it must be a level playing field. There is no point in the UK sticking its head out ahead of the game and actually rendering UK manufacturing at a competitive disadvantage to the Continent. It doesn't make any sense. We need the whole of Europe to be moving forward at the same rate in these ways."
But Chambers also thinks there is a strong business case for Pilkington, which employs around 2,000 people in the North West, to maintain its UK manufacturing presence, for the time being at least: "There will always be a need for a level of manufacturing in the UK," he says.
"I hope that UK industry, with the support of government and its policies, is able to get itself competitive enough that it goes from strength to strength rather than decline.
"There is a market in the UK for the use of glass in buildings and vehicles. And what we would ideally always like to do is manufacture as close as possible to the customer."
Despite energy costs and pressures on margins - issues Pilkington seems to have successfully scaled - the future for glass manufacture looks rosy. Demand is expected to increase in both the company's building products division and its automotive products division.
Chambers says: "Glass is a growth business. The use of glass in buildings and vehicles continues to grow at something like 4 per cent a year globally by volume. In buildings, architects just love glass. If you look at commercial buildings increasingly they are almost completely made of glass on the outside walls. Even if you built the same number of buildings around the world more glass would get used but actually the number of buildings is increasing as populations increase."
In cars too Chambers says the amount of glass per vehicle is increasing. A Fiesta today compared with one made 20 years ago has 25 per cent more glass area. And in new models the roofs are increasingly being made of glass. "We are now making switchable glazings where when the sun comes out the glass goes dark," he says.
And Pilkington knows that value-added products are where the margins lie. The company spends £329m a year on research and development. Things have moved on since the company first developed the float glass process in 1952, now used the world over, the latest advancement being Pilkington Activ, the world's first self-cleaning glass.
Chambers sees government regulatory changes, such as those to building regulations, as a further opportunity to sell value-added glass, improving margins. "There is no question that we are very positive and enthusiastic about the ability to have a dialogue with government and introduce things like building regulation changes," he says. "It's good for the government, because it helps them to deliver on their Kyoto commitments.
It's good for people because it improves the environment. It leads to more efficient homes and lower energy consumption, which means lower energy bills for homes.
"And it's good for Pilkington because we can develop innovative products that help to reach those levels of building regulations with performance products, which we can charge more for than basic glass. So it's a win, win, win for me."
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