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 bidding team around Covestro, one of Germany’s largest corporations, show its goodwill by sweetening the deal by two euros per share or three percent?
Sheikh Mohammed, who is also Adnoc’s chairman, agreed, paving the way for a potential €14.4 billion deal (including debt) after more than 12 months of rocky negotiations. This would make it Europe’s largest corporate takeover this year, the largest cash deal in the chemicals industry and the first major takeover of a DAX 40 company by a Gulf state.
For Adnoc, the deal of 62 euros per share – a premium of almost 60 percent on the German group’s share price last June before the first talks became known – is part of a five-year, $150 billion plan to transform the group from a traditional state-owned oil company into an international energy giant.
After a series of smaller deals, particularly in the gas assets sector, Covestro is an important acquisition that the oil company Sheikh Mohammed can proudly present at its board meeting in November.
A person familiar with the negotiations said the lengthy courting of the new president was crucial in overcoming the German company’s nervousness.
“Sometimes these things just need to be digested by both sides. You have to get to the right level of trust and if you rush it you may never get there,” they said. “The German side in particular had to understand what Adnoc’s objectives are because it’s not like a private equity firm or a strategic buyer cutting costs.”
Final negotiations could be concluded soon as many of Adnoc’s questions had already been answered in advance of Covestro’s formal due diligence, one person said.
Covestro, spun off from the pharmaceutical company Bayer in 2015, is the market leader in the production of chemicals for foam insulation and specialty plastics. The footballs for this year’s 2024 European Championship will be printed with Covestro’s coatings.
“It is located in the middle of some [climate] “These are the megatrends of change,” said the person familiar with the negotiations. “They are leading the way in foam insulation – and building insulation is growing faster than GDP growth. Polycarbonates are lightweight specialty plastics that are used to replace lighter metals, for example in battery casings for the electric vehicle industry.”
Much of the business is in Asia and the US, they added. “They are not just tied to the German automotive industry and the construction industry. They are much more diversified.”
But Covestro’s share price peaked at EUR 95 in 2018 and had fallen to below EUR 40 before Adnoc began its hunt. Since then, it has risen to EUR 53.86 by Monday’s closing price.
Recently, the German company has suffered from rising energy prices and their impact on its European industrial customers, as well as from competition from China. At its last earnings presentation, Covestro stated that sales volumes had increased, but prices had fallen.
Analysts at TD Cowen said in a note that the fair value of Covestro shares was 41.20 euros. They added that “given Covestro’s stagnant earnings over the past year” and the low prospects of a recovery, it was unclear what strategy management would have presented at its capital markets day on Thursday this week, which was canceled after the transaction was announced.
But analysts at Barclays and Citi each have a price target of 61 euros for the share, and Kepler even has a price target of 65 euros. When presenting its first-quarter results in April, Covestro said it had turned things around and forecast earnings before interest, taxes, depreciation and amortization (EBITDA) of between 1 and 1.6 billion euros for this year.
Sebastian Bray, head of chemicals research at Berenberg, said the deal was an opportunity for Adnoc to expand “by targeting a high-quality asset that has been underperforming over the past two years due to weak demand and [high] European energy prices”.
Covestro’s 20 percent drop in sales to 14.4 billion euros in 2023 and negative net profit made expansion out of the question. Under the financially strong owner Adnoc, the company should now have easier access to capital for growth.
“A market capitalization of $10 billion is not very big for a global company,” said the person familiar with the deal. “You have to make sure you are always anticipating the next cycle and not overextending yourself with the next €2 billion project.”
People close to Adnoc stressed that if the deal is successful, Covestro will be managed independently and will be able to continue to pursue its growth strategy and focus on sustainability. “There is obviously a strong confidence in the management team, its qualifications, its experience and the growth trajectory of this company,” they said.
Covestro is trying to break away from its heavy dependence on petroleum-based raw materials and is experimenting with recycling processes and breaking down plastics into their raw materials so that they can be reused.
When asked how owning a huge oil company fits in with Covestro’s sustainability efforts, CFO Christian Baier told the 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 Borouge, another petrochemical company in the group that is also experimenting with plastics recycling.
Other negotiating points include commitments to unions regarding the 17,500-strong workforce, which was cut by 500 jobs last year, and whether jobs will be retained in Germany while the company continues to grow in the US and Asia.