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Roll with the punches

03 Dec 2015

From dealing with worker strikes to navigating the economic downturn, Jim Ratcliffe MSc13(1980) has endured some tough times while heading up Ineos. But the British businessman has a canny ability to emerge stronger after dealing with adversity  

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Ruffling feathers and making tough decisions are part and parcel of running a business, as Jim Ratcliffe can testify. Since founding Ineos in 1998, Ratcliffe has developed the petrochemicals company into a global operation with a $57 billion turnover. But he has faced adversity in a career which has seen him go from working in venture capital to running a multi-billion dollar company.

One of his biggest and most publicised challenges came in October 2013, when workers at Ineos’ Grangemouth petrochemicals plant went on strike over pensions. Ratcliffe and his management team reached a stalemate during an industrial dispute with trade union Unite, prompting staff at the Scottish-based facility to down tools.

The threat of closure for a site that provided 70 per cent of Scotland’s filling stations with fuel and accounted for 13.4 per cent of the UK’s oil refining capacity was a major concern for the British Government. Its biggest worry was that failure to reach an agreement would have a damaging effect on the stock market and economy.

One month before the strike, Ineos had committed to a £300 million survival plan to save a facility that was haemorrhaging cash: the site was losing £10 million a month, its pension scheme had a £200 million deficit and pension costs were 65 per cent of workers’ salaries.  

The plant’s owners insisted the necessary investment would be made, but only if the facility’s 1,370 workers agreed to a wage freeze and end to the final salary pension scheme. The offer was refused, much to Ratcliffe’s frustration. “Investing that sort of money in a 30-year-old facility when the relationship with the union was a nightmare was just too risky,” he says. “We just weren’t going to do that.”

With no compromise in sight, Grangemouth’s owners took decisive action: they closed the plant and announced plans to axe 800 jobs on 24 October 2013. The decision was reversed the following day, when Unite accepted the owner’s terms in exchange for the £300 million investment to safeguard the facility’s future.

High stakes
The Grangemouth affair is one of several challenges that Ratcliffe has faced since leaving his role at venture capital firm Advent International to start his own business at the age of 40. His five-year stint at Advent ended in 1992, when he sacrificed his secure, well-paid job to co-found Inspec, the speciality chemicals group, after leading a buyout of BP’s chemicals division at Hythe in Kent, England. 

“I started the business in the days when you had to put all your worldly goods on the table. I had to put 100% of the equity that I owned at that stage on the line, so that was the house, savings and even the wife and children, which makes you very focused,” he says smiling.  

The next two years saw Ratcliffe – an MBA graduate from London Business School – and co-founder John Hollowood, a former chemicals executive, expand the business through acquisitions in the UK and US. They also floated the company on the London Stock Exchange. Then in 1998, Ratcliffe left Inspec following its £611 million sale to UK chemicals company Laporte.

Ratcliffe wasted little time in launching his second venture. As part of the Inspec deal, Laporte had acquired an Antwerp-based commodities business that saw its price to earnings ratio drop from 21 to 7 in one quarter of 1998. While Laporte’s board was unsettled by the earnings volatility, Ratcliffe spotted an opportunity to buy a venture with great potential. Material prices at the Antwerp facility would climb and fall with the general cycle of the economy, meaning that short-term losses were offset by long-term profits.

Using his own money, loans and venture capital equity, Ratcliffe bought the business and formed Ineos. That first acquisition set the tone for Ineos’ expansion strategy over the next 10 years, with Ratcliffe targeting the non-core chemical assets of major blue chip companies. The big question for Ratcliffe and his team was whether they could double the earnings of the businesses they bought within five years. If confident of achieving this aim, the team would push ahead with the deal.

By 2008, Ineos had made more than 20 acquisitions, buying assets from companies such as BP, BASF and ICI that were undergoing restructures. It was during this period that Ineos completed its biggest deal: the US$9 billion acquisition of chemicals business Innovene from BP in 2005. The transaction – which included the Grangemouth plant – was a coup for Ratcliffe who convinced BP to sell Innovene rather than list it on the stock market.            

Over the years, Ratcliffe has developed a knack for spotting companies that will add value to Ineos. But he also knows when to walk away from a deal. “You have to be able to say no,” he says. “The more deals you look at, the better you get at picking the right ones. When identifying a really good deal, you don't quibble over the last pound. But you also don’t want to overpay, because you seldom make your money back.”

Tough times
The strategy of buying non-core assets and installing management teams to help turn them into successful businesses had proved highly profitable for Ratcliffe. But the onset of the global economic crisis in late 2008 hit Ineos hard. “Volumes and revenues just collapsed,” Ratcliffe says candidly.

“At that stage, we owned two very large refineries in Marseilles and Scotland; in any refinery, you need a certain amount of oil washing around to keep it operational. That’s oil that you never sell and would have to write off if the refinery closed. In 2008, the price of oil collapsed from $148 a barrel in the summer to $48 by the end of the year. We had 10 million barrels of oil keeping our two refineries wet, which added up to a $1 billion dollars.”

Technically breaching its bank covenants compounded Ineos’ woes. “That opened the doors to our vault,” Ratcliffe says. “We were in technical breach of the covenant, so the banks took €845 million ($946 million) out of the company. When we established all our banking agreements, we never envisaged oil collapsing by $100 a barrel because it had never happened before.”

Ratcliffe knew that drastic measures were needed to bounce back from the financial hit. “We pulled all our people together and said, ‘You're all running big businesses and we don't want you creating panic among the troops. You've just got to do everything you can to rein in cash: stop capital and maintenance expenditure, stop bonuses and can all pay rises,” he says. “And that’s what we did.”

The company then secured a temporary waiver of the covenant in 2009 in exchange for paying higher interest on its bank loans and drawing up a revised five-year business plan. “We persuaded the banks that the last thing they wanted to do was take the keys to a business that made hydrogen cyanide,” Ratcliffe jokes, “because they probably wouldn't be very good at running something that has potentially catastrophic consequences if badly managed.”

Attempts to convince the then British Government to reduce Ineos’ tax bill were less successful. The Labour Party refused Ratcliffe’s request for a temporary deferral of VAT payments – a move that encouraged him and his management team to relocate to Switzerland for a much lower tax rate. Reports suggest he saved £100 million a year in tax.

After five years away, Ratcliffe is planning to bring the company back to the UK at a time when the Conservative Government has lowered corporation tax in a bid to attract more businesses. The company will return in better shape, having overcome its financial troubles amid the economic downturn. Today, Ineos has 17,000 employees, 65 sites in 16 countries producing 60 million tonnes of chemicals per annum and a $57 billion turnover.           

Lead the way
Facing adversity and building one of the world’s biggest petrochemicals companies from scratch has taught Ratcliffe much about leadership. The best leaders surround themselves with people who between them have the range of skills and expertise needed to run a successful business.

“The most important thing in leadership is to have a team of people that are capable and motivated, because you can delegate to them and feel comfortable when they make decisions,” he says. “Choosing your team and managing them is absolutely critical; having the right people in place and giving them responsibility gives a leader time to focus on other things.” 

When acquiring businesses to expand Ineos, Ratcliffe and his management team look for people in the target company who can adapt easily to the new culture following the takeover. They are then given autonomy for a venture that operates under the Ineos umbrella. “They're almost managing their own business,” Ratcliffe says. “They've got lots of independence, which some people are comfortable with and others aren’t. You’d never get that at companies like BP, irrespective of how senior you are.”

Top leaders are also good humoured, according to Ratcliffe. “Chief executives who have a sense of humour attract better teams, because their people spend a lot of time with them and want to enjoy it. Life isn’t much fun if you’re working for a miserable sod.”

Cracking a joke was the last thing Ratcliffe wanted to do when dealing with the Grangemouth affair or addressing the company’s financial concerns in 2008. But after overcoming these and other challenges, and emerging stronger, he can afford to smile.  

Author: Rob Morris