Adnoc’s long Covestro pursuit will result in the largest takeover in Europe this year

Last week, Sheikh Mohammed bin Zayed al-Nahyan found an Adnoc request in his in-tray.

Can the team that is bidding on Covestro, Germany’s biggest company, show goodwill with a sweetening of €2 per share, or 3 percent?

Sheikh Mohammed who is also the chair of Adnoc agreed. This unlocks a potential €14.4bn, including debt deal after over 12 months of on and off negotiations. It would be Europe’s largest takeover this year. The biggest cash-deal in chemical industry. And the first major takeover of Dax 40 by a Gulf State.

Adnoc’s €62 per share deal, which represents a nearly 60% premium over the German group’s share price in June last year before the news of the first talks broke, is part of its five-year $150bn plan for transformation from a traditional, state-owned oil giant to an international energy company.

Covestro, after a series of smaller deals in particular with gas assets, is a marquee acquisition that the oil firm can proudly present Sheikh Mohammed during its full board meeting in November.

A person familiar with the negotiations stated that the long courtship was essential in overcoming the nervousness on the part of the German firm.

Sometimes these things have to be digested both by the parties. “You need to achieve the right level of trust and if you hurry, you may never reach it,” they said. “Especially the Germans needed to understand Adnoc’s goals, as it isn’t like a private equity or strategic buyer that slashes costs.”

One person stated that the final negotiations may be concluded soon as Covestro has already answered many of Adnoc’s questions before formal due diligence.

Covestro is the market leader for chemicals used in foam insulation, and specialty plastics. It was spun off from Bayer Pharma in 2015. Covestro coatings are used on the footballs of this year’s Euro 2020 championships.

The person who was familiar with the negotiations said that “it is right in the middle [of] some megatrends of [climate] change.” Insulating buildings is increasing faster than GDP. Polycarbonates, lightweight engineering plastics that are lighter than metals are used in the battery casings of electric vehicles.

They added that a large portion of their business was conducted in Asia and the US. They are not only tied to the German construction and automotive industries. They are more diversified.”

Covestro shares peaked at €95 in 2018, but had dropped to below €40 by the time Adnoc began its pursuit. Since then, it has increased to €53.86 – its Monday closing price.

In recent years, the German company has been affected by higher energy costs and their impact on European industrial customers as well as competition from China. Covestro stated that its sales volume had increased but its prices had decreased at its last results presentation.

In a note, analysts at TD Cowen stated that the fair value of Covestro shares was €41.20. They added that, “considering Covestro’s stagnant earnings in the past year and the slim prospects for recovery,” it was unclear which strategy the management had planned to present at the capital markets day scheduled on Thursday, this week. The event was cancelled following the announcement.

Analysts at Barclays, Citi and Kepler have all set price targets for the stock of €61 per share. Covestro announced its first-quarter earnings in April and said that it had made a turnaround. It forecasted EBITDA for this year between €1bn to €1.6bn.

Sebastian Bray is the head of Berenberg’s chemicals research. He said that the deal would allow Adnoc to expand by “targeting a high-quality asset which hasn’t performed well in the past two years because of weak demand and [high] European prices for energy”.

Covestro’s negative net income and 20 percent drop in sales to €14.4bn in 2023, coupled with a 20-percent decline in sales to €14.4bn in 2023, made expansion impossible. Adnoc’s cash-rich ownership will likely give the company more capital to grow.

A $10bn market capitalization is not a large amount for a global firm, said a person familiar with the deal. You have to be sure that you’re always anticipating the next cycle, and don’t overextend yourself with the next €2bn projects.

Adnoc’s close associates have stressed that, if the deal is completed, Covestro would be allowed to manage itself independently, and pursue its own growth strategy. They also said it would continue to focus on sustainability. They said that there was a strong belief in the management team and their experience, credentials, and growth trajectory.

Covestro is working to reduce its dependence on oil-derived feedstocks and is exploring ways to recycle and break down plastics into raw materials, so it can reuse them.

Christian Baier, chief financial officer of Covestro, told Wirtschaftswoche magazine in May that sustainability was at the core to the company’s strategy.

People close to Adnoc have pointed out synergies between the company and its other petrochemical firm Borouge which is also testing plastic recycling.

Negotiations will also include the unions of Covestro, whose workforce was reduced by 500 last year to 17,500 people, as well as whether or not jobs in Germany are maintained while the company continues its growth in the US and Asia.