ADNOC German deal is blueprint for Gulf takeovers
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Karen Kwok
LONDON, Oct 1 (Reuters Breakingviews) -Abu Dhabi National Oil Company (ADNOC) has succeeded where other Gulf buyers failed. After more than a year of negotiation, the Emirati oil giant led by Sultan al-Jaber has finally struck a deal to buy German chemical company Covestro 1COV.DE for 14.7 billion euros including debt. It sets a blueprint, though a tricky one, for other Middle Eastern buyers interested in sensitive European assets.
The two sides on Tuesday announced an agreement, more than 15 months after the first reports of an approach. The price, at 62 euros per share, is more than 50% above Covestro’s undisturbed level from last summer. That’s still a good reflection of the premium on offer, because rivals’ shares have on average flatlined since last June.
The fact that ADNOC has gotten this far is notable. Other deep-pocketed Gulf suitors met opposition in recent years. Spain’s state holding company, for example, snapped up shares in mobile operator Telefónica TEF.MC after a Saudi telecom group announced plans to buy a stake. Britain’s government, meanwhile, effectively blocked an Emirati-backed takeover of the Telegraph newspaper.
The first lesson from ADNOC’s success is to pay a high price and promise tons of investment. Jaber’s offer implies an enterprise value for the Leverkusen-based Bayer BAYGn.DE spinoff of just over 12 times the EBITDA that analysts expect it to generate this year, according to Breakingviews calculations. The six competitors listed in Covestro’s annual report on average trade at 10 times 2024 EBITDA, according to Visible Alpha data.
And since cost savings seem unlikely, Jaber is looking at a low return. Analysts reckon Covestro will generate 834 million euros of operating profit in three years’ time. Deduct tax at 30%, and the implied return on invested capital on the total outlay is just 4%. That’s before factoring in the 1.2 billion euros of extra capital that ADNOC has promised to invest in the company, which should help with the response to intensifying Chinese competition and higher energy costs in the European chemical industry.
Meanwhile, Jaber has signed an investment agreement that runs until the end of 2028. ADNOC has committed to keep the current management team in place, retain two independent members of the supervisory board and not to “sell, close or significantly reduce Covestro's business activities as part of the transaction”.
In other words, ADNOC has made itself palatable by promising to bring bags of money while making minimal changes to the way the target company is run. It’s particularly striking that Covestro was able to secure such a good package, since slow demand in the chemical sector arguably weakened its standalone prospects and therefore its bargaining power. Jaber, for his part, is probably happy to make those concessions to boost his wider M&A-led diversification push at ADNOC. Whether it’s an easily repeatable formula for other Gulf buyers, though, is less clear.
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CONTEXT NEWS
Abu Dhabi state oil giant ADNOC on Oct. 1 said it had agreed to buy German chemicals producer Covestro for 62 euros per share, implying an equity value of 11.7 billion euros and an enterprise value for the German company of 14.7 billion euros.
The United Arab Emirates-based acquirer also said that it would subscribe to a planned 1.2-billion-euro capital increase for Covestro after completing the offer.
ADNOC has set a minimum acceptance threshold for the deal of 50% plus one share. The buyer also said that it will not seek a domination or profit and loss transfer agreement, which under German law allows a company to directly control the management and cash flow of a target.
Covestro and ADNOC have agreed a so-called investment agreement which runs until the end of 2028. The terms require ADNOC to maintain Covestro's existing business activities, corporate governance and basic organisational structure, while also continuing to recognise existing labour and collective bargaining agreements with employees.
Shares in Covestro rose 4% to 58 euros as of 0900 GMT on Oct. 1.
Shares in Covestro's rivals flatlined amid ADNOC talks https://reut.rs/3N5ahsP
Editing by Liam Proud and Streisand Neto
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