Sheikh Mohammed bin Zayed al-Nahyan, the president of the United Arab Emirates, found a request in his inbox last week from the Abu Dhabi National Oil Company Adnoc.
Could the team bidding for Covestro, one of Germany’s biggest companies, show goodwill by sweetening the deal by 2 euros a share or 3 percent?
Sheikh Mohammed, who is also chairman of Adnoc, agreed and after more than 12 months of stalled negotiations, he unlocked a potential deal worth 14.4 billion euros, including debt, which would make it Europe’s biggest takeover of the year, the biggest cash deal in the chemicals industry and the first major takeover of Dax 40 by a Gulf state.
For Adnoc, the 62-euro-per-share deal – a premium of almost 60 percent over the German group’s share price last June before reports of initial talks – is part of a five-year, $150 billion transformation plan. a traditional state-owned oil company has become an international energy giant.
Having completed a series of smaller deals, notably for gas assets, Covestro is a flagship acquisition that the oil company can proudly present to Sheikh Mohammed at its full board meeting in November.
One person familiar with the negotiations said the long courtship was essential to overcoming the nervousness of German society.
“Sometimes these things just have to be digested by both sides. You have to reach the right level of trust, and if you rush it, you may never get there,” they said. “The German side in particular needed to understand what Adnoc’s goals were, because it’s not like a private equity firm or a strategic buyer that cuts costs.”
Final negotiations could close soon because many of Adnoco’s questions have already been answered by Covestro ahead of formal due diligence, one of the people said.
Covestro, spun off from pharmaceutical company Bayer in 2015, is a market leader in the production of chemicals used to make foam insulation and specialty plastics. The soccer balls in this year’s Euro 2024 championship are printed with Covestro paints.
“It’s a smack in the middle of some.” [climate] transitional megatrends,” said a person familiar with the proceedings. “They lead in forms of foam insulation – and building insulation is growing at a rate higher than GDP growth. Polycarbonates are lightweight special engineering plastics that are used to replace metals with lighter weights, for example in battery cases for the electric vehicle industry.
Much of its business was in Asia and the US, they added. “They are not only tied to the German automotive industry and the construction industry. They are much more diverse.”
But Covestro’s share price peaked at €95 in 2018 and fell below €40 before Adnoc began operations. It has since risen to €53.86, Monday’s close.
Recently, the German company has suffered from higher energy prices and their impact on European industrial customers, as well as competition from China. In its latest results presentation, Covestro said that while sales volume rose, its prices fell.
Analysts at TD Cowen said in a note that the fair value of Covestro shares was €41.20, adding that “given Covestro’s stagnant earnings last year” and little prospect of a recovery, it was unclear what strategy management would present on its capital markets day on Thursday this week, which was canceled after the deal was announced.
But Barclays and Citi analysts have a price target of €61 per share and Kepler has €65. In its first-quarter results in April, Covestro said it had turned the corner, forecasting earnings before interest, tax, depreciation and amortization (Ebitda) for this year of between €1 billion and €1.6 billion.
Sebastian Bray, head of chemical research at Berenberg, said the deal was a way for Adnoc to expand “by targeting a quality asset that has not performed as well in the last two years due to weak demand and [high] European Energy Prices’.
A 20 percent drop in Covestro’s sales to 14.4 billion euros in 2023 and a negative net income ruled out expansion. Under Adnoc’s cash-rich ownership, the company will likely have greater access to capital for growth.
“A market cap of $10 billion is not very big for a global company,” said a person close to the deal. “You have to make sure you’re always ahead of the next cycle and don’t go overboard with the next €2 billion project.”
People close to Adnoc stressed that if the deal goes through, Covestro will be run independently and allowed to continue its growth strategy as well as its focus on sustainability. “It is clear that there is a strong belief in the management team, its credentials, experience and the growth trajectory of this company,” they said.
Covestro is trying to move away from its heavy reliance on petroleum-derived raw materials and is experimenting with ways to recycle and break down plastics back into raw materials for reuse.
Asked how ownership of the oil giant fits Covestro’s sustainability efforts, the company’s CFO Christian Baier told German business magazine Wirtschaftswoche in May: “One thing is clear: sustainability is at the heart of our strategy.”
People close to Adnoc pointed to synergies with another petrochemical company, Borouge, which is also experimenting with plastic recycling.
Other talking points will include commitments to Covestro’s unions regarding its 17,500 workforce, which was cut by 500 last year, and whether jobs in Germany will be preserved as the company continues to grow in the US and Asia.