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The United Arab Emirates has launched the largest takeover deal in its history after Abu Dhabi’s state oil company on Tuesday made a €14.7bn offer for the German chemicals company Covestro.
Abu Dhabi National Oil Company said Covestro’s board had recommended its €62 a share offer, a premium of more than 50 per cent to the company’s share price before talks between the two sides were revealed about 16 months ago. Adnoc will also inject roughly €1.2bn of new money into Covestro as part of the transaction.
Frankfurt-listed Covestro is a jewel of German industry that was spun out of the conglomerate Bayer in 2015. The company is a leader in the production of polyurethane foam that is omnipresent in household appliances and insulation, as well as in polycarbonate, a lightweight but strong plastic that is widely used in the automotive industry.
“For us, it is a massive deal, a step change. It is part of future proofing our business,” said Khaled Salmeen, the executive director of Adnoc’s downstream business.
Adnoc, which pumps nearly three times as much crude oil every day as Shell, is in the process of diversifying its business in preparation for a world that is less reliant on oil as a fuel, but which has a growing appetite for oil-derived products, such as plastics.
Covestro’s main products are rigid and soft polyurethane foams, used for everything from the insulation in refrigerators to seat cushions, and polycarbonates that are used for the interiors and exteriors of cars, as well as casings for electric vehicle batteries.
Adnoc has said it will spend $150bn between 2023 and 2027 on capital expenditure and is in the process of building both its gas business, which it thinks will be in high demand as Asian countries switch from using coal to gas in power plants, and its chemicals arm.
“What we are trying to create is a global company that is able to rank in the top five in the [chemicals] sector. Economies of scale and the ability to have a growth platform is important,” said Salmeen.
As well as requiring clearance from regulators in Berlin, the transaction is likely to face screening in Brussels where EU officials could ask for pledges that state-owned Adnoc will not inject funds into Covestro that will give it an unfair advantage over European competitors such as BASF, said three people with knowledge of the EU’s thinking.
Salmeen said Adnoc was confident the deal would be approved by all regulators. “We will go through the regulatory process, but we are not in the polycarbonate or polyurethane business, this is a new value chain [for us]. I don’t see that competition should be in the way given we do not operate in that vertical.”
The cyclical nature of the chemicals industry, which is currently suffering from overcapacity as Chinese competitors have brought new plants online and from falling demand in Europe, means that Covestro’s share price has not traded above Adnoc’s offer in more than three years.
But Salmeen said Covestro was not reliant on the weak European market. “It is a global company, almost evenly split between North America, Europe and Asia. You need to be next to your customers doing the research and development together. A lot of the things you see in cars today were developed four or five years ago,” he said.
Covestro chief executive Markus Steilemann said: “With Adnoc International’s support, we will have an even stronger foundation for sustainable growth in highly attractive sectors and can make an even greater contribution to the green transformation.”
Adnoc said it had asked the Covestro management team to stay on after the completion of the deal. It also said it would support “the commitments made to Covestro’s employees and has undertaken to uphold existing works council, collective bargaining, and similar agreements”.