Adnoc’s long Covestro chase set to achieve Europe’s largest takeover of 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 in-tray last week. 

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

Sheikh Mohammed, who is also chair of Adnoc, agreed, unlocking a potential €14.4bn 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 chemical industry and the first big takeover of a Dax 40 company by a Gulf state.

For Adnoc, the €62-a-share deal — a premium of nearly 60 per cent on the German group’s share price last June before news of the initial talks — is part of a five-year, $150bn plan to transform itself from a traditional state-owned oil company into an international energy giant.

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

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

“Sometimes these things just have to be digested by both sides. You need to reach the right trust level and if you rush it, then you might never get there,” they said. “Especially the German side needed to understand what Adnoc’s objectives are, because it is not like a private equity firm or a strategic buyer who slashes costs.”

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

Covestro, spun out of pharma company Bayer in 2015, is a market leader in producing the chemicals used to make foam insulation and speciality plastics. The footballs in this year’s Euro 2024 championships are printed with Covestro’s coatings. 

“It is smack in the middle of some [climate] transition megatrends,” said the person with knowledge of the negotiations. “They are leading in forms of foam insulation — and insulating buildings is growing above GDP growth. Polycarbonates are lightweight speciality engineering plastics, which are used to replace metals with lighter weights, for example in battery casings for the electric vehicle industry.” 

A large part of its business was in Asia and in 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 in 2018 at €95 and had fallen to under €40 before Adnoc started its pursuit. Since then it has risen to €53.86, its Monday close.

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

Analysts at TD Cowen said in a note that fair value for Covestro’s shares was €41.20 and added that “considering the stagnant earnings at Covestro in the last year” and the slim prospect of recovery, it was unclear what strategy the management would have presented at its capital markets day on Thursday this week, which was cancelled after the deal announcement. 

But analysts at Barclays and Citi both have price targets of €61 a share on the stock, and Kepler has €65. At its first-quarter results in April, Covestro said it had turned a corner and was forecasting earnings before interest, tax, depreciation and amortisation (Ebitda) for this year of between €1bn and €1.6bn.

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 done that well operationally in the last two years due to weak demand and [high] European energy prices”.

Covestro’s 20 per cent fall in sales in 2023 to €14.4bn and negative net income left expansion out of the question. Under the cash-rich ownership of Adnoc, the company is likely to have more access to capital for growth.

“A $10bn market cap is not very large for a global company,” said the person close to the deal. “You have to make sure you are always pre-empting the next cycle and not overextending yourself with the next €2bn project.” 

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

Covestro is trying to transition away from its heavy dependence on feedstocks derived from oil, and is experimenting with ways of recycling and breaking down plastics back into raw materials so that it can reuse them. 

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

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

Other points for negotiation will include commitments to Covestro’s unions over its 17,500-strong workforce, which was trimmed by 500 people last year, and on whether jobs are preserved in Germany as the company grows further in the US and Asia.