ADNOC has acquired a majority stake in German polymer manufacturer Covestro

State-run oil company Adnoc has purchased a controlling interest in the Bavarian polymer specialist Covestro. According to a release from ADNOC on Monday, the deal would now have surpassed the minimum acceptance threshold of 50% plus one share in a voluntary public tender offer. Together, the shares that have been tendered through the first acceptance phase along with the shares acquired by XRG represent nearly 69.94% of the share capital. 

Shareholders of Covestro AG who have yet to accept the offer for shares may still join in the action by submitting shares on or before December 16, 2024. That is, shareholders have until that date to submit an acceptance of the takeover offer in consideration. The announcement of final results will be made by ADNOC on December 19, 2024, marking the end of the additional acceptance period.

In a joint statement as well as accompanying statement of reasons issued on November 7, 2024, the Management Board and the Supervisory Board of Covestro recommend that the shareholders accept the offer in takeovers.

Adnoc, via XRG, its newly-created investment company which has a majority stake in Covestro AG, will by such action place itself amongst the global top-five chemical companies and mark a significant step in its growth strategy toward international expansion. 

Completion of the offer remains subject to further regulatory conditions, including merger control, foreign investment control and EU foreign subsidies regulatory approvals, which have been set out in the offer document related to the offer. XRG is now fully focused on satisfying these remaining conditions and expects the transaction to be completed in the second half of 2025.

Following the successful completion of the offer, the Covestro Board of Directors has agreed to support the delisting and/or squeeze-out of Covestro, subject to its fiduciary responsibilities, if XRG intends to implement either of these. ADNOC has given Covestro an undertaking not to enter into a control and/or profit and loss transfer agreement during the term of the investment agreement, which expires on December 31, 2028.

ADNOC has thus taken a decisive step in the acquisition process, which could be a milestone in German economic history in many ways.

This would be the first major acquisition of a DAX company by a Gulf investor and the largest transaction in the European chemical industry in many years, with a value of €11.6 billion. ADNOC sees the acquisition of Covestro as the first step towards the top league of the global chemical industry.

Since ADNOC is not yet actively involved in Covestro's business and market, there should be no problems from an antitrust perspective. At the same time, the deal must also be reviewed by many countries under their applicable foreign direct investment rules, such as whether a country's security interests oppose the sale.

The federal government is expected to approve the Covestro deal

In Germany, the Federal Ministry of Economics has blocked several announced deals - most of which were IT companies that were supposed to be sold to Chinese competitors. The federal government wants to prevent the flow of unique technology from Germany to China.

But it is foreseeable that the sale will not fail due to government investment controls. Covestro's technology and polymer products are not considered security-related infrastructure.

Recently, some people within the government have said that the deal will be criticized. However, ADNOC has always been a reliable partner and has maintained a trusting cooperation with the federal government. The company supplies liquefied natural gas to Germany.

The timing of ADNOC's acquisition of Covestro is just right. According to industry insiders, ADNOC has identified DAX Group as a potential acquisition target as early as a few years ago. Covestro's share price fell sharply after the economic downturn in 2022/23.

ADNOC began informal talks with Covestro in June 2023. Since the economic weakness continued a year later, and Covestro's profit outlook also weakened, the acquisition price did not have to exceed the announced 62 euros per share.

The two companies do not expect the transaction to be completed until the second half of 2025. Then a new era will begin for Covestro: The company was spun off from Bayer in 2015. Since then, Covestro has been fending off takeover attempts by financial investors.

With 17,500 employees, Covestro produces plastic intermediates for the automotive, furniture, household appliances and construction industries. With this acquisition, ADNOC will gain access to more advanced materials for electric vehicles, insulation and technical plastics.

The Covestro Board of Directors fully supports ADNOC's proposal, and the investment agreement gives the company maximum guarantees:

Covestro's key role: ADNOC sees Covestro as a platform for further growth in its chemicals business. As a division of the newly formed subsidiary XRG, Covestro will play a central role in ADNOC's expansion of its materials business, such as plastics and specialty chemicals. Covestro CEO Markus Steilemann stressed the acquisition and investment advantages that ADNOC brings as a partner. ADNOC promises to provide capital and expertise - regardless of the current economic downturn;

Further acquisitions: Covestro is only part of XRG, and the new company will also invest in other chemical businesses and hydrogen projects. To become one of the world's top five chemical companies, XRG's sales must exceed $45 billion, of which Covestro contributes only a third. Further deals are therefore foreseeable;

Other platforms: ADNOC is currently in talks with Austrian oil company OMV on the reorganization of its basic and specialty chemicals division, in which ADNOC has a stake. ADNOC has already acquired a majority stake in fertilizer company Fertiglobe. The Middle East's largest nitrogen fertilizer producer will be expanded as a platform for ADNOC's green ammonia business. Ammonia is considered an energy-efficient transport carrier for hydrogen;

Green transition: Covestro is a leader in future chemical technologies that are no longer based on fossil raw materials. Renewable raw materials should be used instead of oil and gas - including a circular economy with new raw materials from plastic waste. This is interesting for ADNOC, as the company is preparing for the era after the decline of oil and gas production.

For at least the next four years, Covestro can continue in its current form with ADNOC as owner and partner. ADNOC has provided it with extensive assurances: Covestro will remain a German stock corporation with joint decision-making and will be managed in accordance with German domestic corporate governance guidelines.

The Covestro board is retained, while ADNOC will have four seats on the 12-member supervisory board, one of which will be chairman. The investment agreement does not actually include the relocation of the plant or headquarters. German Covestro employees will not be fired for operational reasons until 2032.

It remains to be seen whether ADNOC will implement other plans with Covestro after the expiration of the investment agreement. The idea of ​​moving production to the Middle East, where energy is cheaper and more cost-effective, is likely to meet huge resistance in Germany.

However, Covestro CEO Markus Steilemann does not expect this. "Energy costs are only one factor when deciding on a production site. Proximity to customers and markets is very important," he said in an interview with the media. "We are a supplier to Europe with very low costs and close to large industrial customers. These customer markets do not exist in the Middle East."