Adnoc/Covestro: strong chemistry explains the attraction

Deep-pocketed strategic investors occasionally like to engage in a spot of bottom fishing. One Gulf-based energy group may have got out its rod to do just that in the European chemical sector. This might explain reports that Abu Dhabi’s Adnoc has made a preliminary €13.5bn offer for Germany’s Covestro. 

Strategically, diversifying into cleaner and higher-growth sectors makes sense for Abu Dhabi’s national oil company. With the energy transition starting to bite, it faces slowing growth in its core business. It has earmarked $150bn to invest in natural gas, chemicals and clean energy.

Adnoc has a penchant for chemicals. It owns a majority stake in Borouge, a joint venture with Austria’s Borealis, and recently took Mubadala’s place in the share capital of both Borealis and OMV, which controls it. A few weeks ago it teamed up with Apollo to make an indicative offer for a stake in Brazil’s Braskem.

European chemicals trade cheaply. China’s disappointing recovery has followed close on the heels of the gas crisis, which squeezed margins. Rival German chemicals group Lanxess warned on Tuesday over macro headwinds. While Adnoc’s informal offer — about €55 a share — is at a premium of about 35 per cent to Covestro’s undisturbed stock price, that is only where the shares traded in early 2022. 

On most measures, that does not look particularly generous, especially considering Covestro’s strong position in the production of foams and polycarbonates.

It implies an enterprise value of about €13.5bn including debt and pension liabilities, equivalent to 9.6 times consensus ebitda for the current, depressed, year, but less than five times next year’s target for “mid-cycle” ebitda. It is also at a 40 per cent discount to the asset replacement value of about €90 per share, as estimated by Sebastian Satz at Barclays.

True, the last time the stock reached replacement value was in 2018. Yet selling out at the bottom of a cycle may not appeal either. An offer from Adnoc would provide an acid test of the market’s confidence in a recovery.