#AbuDhabi National Oil Sidesteps Hedge Funds With Covestro Bid - Bloomberg

Abu Dhabi National Oil Sidesteps Hedge Funds With Covestro Bid - Bloomberg

The first question at the beginning of any German takeover is what the ending looks like. Buying a Frankfurt-listed company is typically a tortuous process which can see hedge funds push for a higher price and workers and politicians cry foul. Abu Dhabi National Oil Co.’s €12 billion ($13 billion) offer for Covestro AG may yet succeed in sidestepping both hurdles — and pave the way for more inbound acquisitions.

First, the technical problem. Corporate and private equity bidders often seek to get 75% ownership of German targets, the voting level where they’re able to implement a so-called domination agreement enabling them to dictate strategy and gain direct access to cash flow. That allows merger arbitrageurs to force bidders to pay up for the last bucket of shares that will get the suitor over that threshold.

But Adnoc isn’t a conventional industrial buyer needing to micromanage the company and harvest synergies by integrating Covestro into its wider operations. To the contrary, it wants to keep current management in place and continue with the firm’s existing strategy. The buyer’s goal here is diversification — downstream into chemicals, and away from oil.

Nor does wealthy Adnoc need control over the cash flow to finance leverage in the way a private equity bidder would. The opposite is the case; it’s injecting €1.2 billion. Hence Adnoc can from the outset forswear the desire for any domination agreement. It’s content to settle for a 50%-plus-one-share holding. A follow-on offer to delist Covestro may eventually be forthcoming, but there appears to be less scope here for fireworks than in past German transactions.

What about the price? The €62-a-share offer is 54% above Covestro’s level in June 2023 before Bloomberg News reported takeover interest. Equity markets may have gained since then, but shares of many of Covestro’s chemicals peers have gone sideways. The premium is genuinely high. A deal has been anticipated for many months, and the agreed price is still 8% more than Monday’s close and 35% over analysts’ average price target for Covestro before talks became public.

At €15 billion including assumed net debt, the transaction is worth over nine times predicted earnings before interest, tax, depreciation and amortization. That compares with BASF SE’s forward trading multiple of seven times. The trickier issue is ostensibly the politics of a foreign sovereign takeover of a key player in the German chemicals sector at a time when the country’s industrial sector is struggling more broadly. But an acquisition that supports incumbent management and comes with a simultaneous investment commitment is going to be harder to challenge. Would Covestro’s existing public-market shareholders want to invest so much? The share price would go the other way if they were asked.

Germany has many decent industrial assets trading with weak share prices. And there’s a lot of acquisitive capital, in particular in the hands of Gulf sovereign buyers, looking for a home. This transaction has been a long time coming, and of course there remains uncertainty ahead of closing. Still, it could be a watershed deal that encourages more to follow.