Adnoc’s cash has good chemistry with struggling German industry

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Middle Eastern oil and gas companies are flush with cash. European industry is on its knees. That creates the conditions for strong chemistry, aka a spot of dealmaking.

That is one way to read Abu Dhabi National Oil Company’s €14.7bn swoop on Germany’s Covestro. The chemicals group, which was spun out of Bayer in 2015, has recommended the offer after a protracted negotiation. This marks the largest cash deal in the chemical industry, and the first big takeover of a Dax 40 company by a Gulf state.

It is hard to fault Covestro for capitulating. It is getting a 54 per cent premium to its undisturbed share price, before rumours surfaced in June 2023. And the transaction values the business at 9 times 2025 ebitda, on Berenberg estimates. Troubled German peer BASF is trading on 7.5 times according to S&P Capital IQ.

True, Covestro is selling out somewhere near the bottom of a long chemicals downcycle. But, in the beleaguered European chemicals sector, faith in a recovery is thin on the ground. Covestro’s acceptance of the deal surely implies that a steep resurgence is unlikely, at least for the foreseeable future.

Moreover, these businesses need to invest in order to grow — ideally countercyclically, when materials are cheap and construction groups sit idly. Yet Covestro, with €3bn of net debt and pension liabilities, or more than 4 times ebitda in the 12 months to June, has little cash to spare. Adnoc’s commitment to inject €1.2bn of additional equity will have helped sway the board, together with commitments to maintain the German company’s operational independence.

The greater mystery is how the transaction benefits Adnoc. The group wants to diversify and has a €150bn investment commitment burning a hole in its pocket. Chemicals, downstream from its traditional oil and gas business, is a comfortable sector. But acquiring unrelated businesses, with no cost savings or cross-selling potential, in challenging sectors is hardly a recipe for straightforward value creation.

For all that, Covestro is not a bad play, assuming the cycle eventually turns. It has plants across the globe and lower cost assets compared with local competitors. Adnoc plans to use it as a platform investment, through which it can bolster its position in chemicals further. Over a very long time horizon, it may even pay off.

Getting this deal across the line marks a success for Adnoc as it seeks to spread its wings beyond Gulf-based oil. German policymakers and unions appear to welcome it, at least based on the dignified silence with which they greeted this announcement. It may provide a test case for other Middle Eastern investors as they scour the world for opportunities.

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