Adnoc’s long hunt for Covestro should produce Europe’s biggest takeover of the year

Sheikh Mohammed bin Zayed al-Nahyan, President of the United Arab Emirates, found a request from Abu Dhabi’s national oil company Adnoc in his inbox last week.

Could the team that bid for Covestro, one of Germany’s largest companies, show goodwill by sweetening the deal by €2 per share, or 3 percent?

Sheikh Mohammed, also chairman of Adnoc, agreed, facilitating a potential 14.4 billion euro deal, including debt, after more than 12 months of on-off negotiations that would make it Europe’s biggest takeover this year , the largest cash deal in the world. chemical industry and the first major takeover of a Dax 40 company by a Gulf state.

For Adnoc, the €62 per share deal – a premium of almost 60 percent on the German group’s share price last June before news of the first talks – is part of a five-year, $150 billion plan to transform itself from a traditional state oil company transformed into an international energy giant.

After completing a series of smaller deals, particularly for gas assets, Covestro is a tent-pole acquisition that the oil company can proudly present to Sheikh Mohammed at the full board meeting in November.

One person with knowledge of the negotiations said the lengthy courtship had been key to overcoming the German company’s nervousness.

“Sometimes these things just have to be digested by both parties. You have to get to the right level of trust and if you rush too much you may never get there,” they said. “The German side in particular had to understand what Adnoc’s objectives are, because it is not a private equity firm or a strategic buyer that reduces costs.”

The final negotiations could be concluded soon as many of Adnoc’s questions have already been answered by Covestro ahead of the formal due diligence, one person said.

Covestro, which emerged from pharmaceutical company Bayer in 2015, is a market leader in the production of chemicals used to make foam insulation and specialty plastics. The footballs of this year’s Euro 2024 Championships are printed with Covestro’s coatings.

Covestro’s chemical plant in Dormagen, Germany. ‘They are not only tied to the German car industry and the construction sector. They are much more diverse’ © Dario Pignatelli/Bloomberg

“It’s located in the middle of a number [climate] transition megatrends,” said the person with knowledge of the negotiations. “They are leading the way in foam insulation – and building insulation is growing beyond GDP growth. Polycarbonates are lightweight specialty engineering plastics, used to replace metals with lighter weights, for example in battery casings for the electric vehicle industry.”

Much of the activity took place in Asia and the US, she added. “They are not only tied to the German car industry and the construction sector. They are much more diverse.”

But Covestro’s share price peaked at €95 in 2018 and had fallen below €40 before Adnoc began its pursuit. It has since risen to €53.86, the Monday close.

More recently, the German company has suffered from higher energy prices and their impact on its European industrial customers, as well as competition from China. At its last results presentation, Covestro said that while sales volumes had increased, prices had fallen.

Analysts at TD Cowen said in a note that the fair value of Covestro shares was €41.20, adding that “given the stagnant profits at Covestro over the past year” and the slim prospect of recovery, it was unclear which strategy management would have presented its capital markets day on Thursday this week, which was canceled after the deal was announced.

But analysts at Barclays and Citi both have price targets of $61 per share, and Kepler has $65. At its April first quarter results, Covestro said it had reached a turning point, forecasting earnings before interest, taxes, depreciation and amortization (Ebitda) of between 1 billion and 1.6 billion euros for this year.

Sebastian Bray, head of chemicals research at Berenberg, said the deal was a way for Adnoc to expand “by targeting a good quality asset that has not performed well operationally over the past two years due to weak demand and [high] European energy prices”.

Covestro’s turnover decline of 20 percent in 2023 to 14.4 billion euros and a negative net result made expansion ruled out. Under Adnoc’s rich capital, the company is likely to gain greater access to capital for growth.

“A market cap of $10 billion is not very big for a global company,” said the person close to the deal. “You have to make sure you are always ahead of the next cycle and not overloading yourself with the next €2 billion project.”

People close to Adnoc stressed that if a deal goes through, Covestro will be independently managed and will be able to continue its growth strategy as well as its focus on sustainability. “There is clearly a strong belief in both the management team, their credentials, experience and the growth trajectory of this company,” they said.

Covestro is trying to move away from its heavy dependence on raw materials from oil, and is experimenting with ways to recycle plastics and break them down into raw materials so that it can reuse them.

Asked how ownership of a huge oil company fit in with Covestro’s sustainability efforts, Christian Baier, the company’s chief financial officer, told German business magazine Wirtschaftswoche in May: “One thing is clear: sustainability is at the core of our strategy.”

People close to Adnoc pointed to synergies with the company’s other petrochemical business Borouge, which is also experimenting with recycling plastics.

Other negotiating points include commitments to Covestro’s unions on its 17,500-strong workforce, which was cut by 500 people last year, and whether jobs in Germany will be retained as the company continues to grow in the US and Asia.

Leave a Comment