Adnoc to buy Covestro, continuing expansion into polymers

The Abu Dhabi National Oil Company (Adnoc) has agreed to pay almost €12 billion (£10 billion) for plastics maker Covestro, and take on Covestro’s €3 billion in net debt. The state-owned oil and gas producer from the United Arab Emirates had pursued the German company for over a year in an effort to further diversify its business.

The move fits the Adnoc’s ‘smart growth and future proofing strategy and our vision to become a top 5 global chemicals company,’ said chief executive Sultan Ahmed Al Jaber.

Covestro, formed by the spin-out of Bayer’s MaterialScience division in 2015, is a leading manufacturer of polymer materials, especially polyurethanes, polycarbonates and speciality chemicals used in construction, automotives and electronics.

‘What makes this deal unusual, apart from the sheer size of the transaction, is that Covestro is arguably a midstream chemicals company,’ says Sebastian Bray, head of chemical research at Berenberg Bank. ‘My view is that Adnoc, a cash-rich company with a base in oil and gas and considerable experience of refining and some in upstream chemicals, is thinking about its growth prospects on a decades-long view,’ says Bray.

Earlier this year, Adnoc bought a 25% stake in OMV, a global energy and chemicals group headquartered in Vienna, Austria. It also made moves to acquire Braskem, a Brazilian petrochemical producer, before withdrawing in May.

In a client report, consultants Wood Mackenzie wrote: ‘Adnoc continues to grow its marketing and chemicals segments which should help offset an expected drop in refining margins within its downstream business.’ The OMV acquisition and ongoing discussion to ‘merge its chemicals subsidiaries Borealis and Borouge looks set to create one of the world’s biggest polymer producers,’ the report noted.

Wood Mackenzie’s report concluded that Adnoc’s new purchase will give it access to innovative markets related to the energy transition: ‘Covestro is big in downstream polymer markets, producing a group of performance materials used in a variety of end use applications such as EV chargers, automotive parts and protection of wind turbines.’

Meanwhile, with a 10.6% decline, the EU chemical industry reported the third-largest drop in production in 2023, according to industry group Cefic. ‘The chemical industry in Europe has had two very difficult years due to weak demand and higher energy costs. The situation appears to have broadly stabilised, but the recovery is still not really gathering steam,’ says Bray.

The most important products made by Covestro are polyurethanes, chiefly based on toluene diisocyanate (TDI) and methylene diphenyl diisocyanate (MDI). TDI is best known for making soft foams for products like mattresses and shoe soles, but it has a variety of other uses too. MDI is for making hard foams, most commonly for insulation, but also in coatings.

A second major category is polycarbonates, often used to replace metal in the automotive and electronic industries. The third segment includes the resins business it bought from Dutch company Royal DSM in 2021, which serves the coatings market amongst others.

Demand for these products had not met expectations for the last two to three years, partly due to slow economic growth in China and factors such as pressure on the automotive industry. Nonetheless, chemicals demand is still likely to grow in the mid- and long-term, says Bray, even if not at the same rate as the past two to three decades.

Adnoc has agreed to maintain Covestro’s existing business activities, corporate governance and business structure, as well as agreements with workers. There are no plans to sell, close or significantly reduce Covestro’s business activities as part of the deal. The transaction is structured in a way that will give Covestro over €1 billion to invest its growth strategy. Covestro has ‘been considering building a new largescale MDI plant and its plausible that some of the proceeds could be used for that purpose,’ says Bray.

The deal has turned heads. ‘That an asset of this size and prestige is acquired by an oil and gas company may change investor expectations about what is possible in terms of oil and gas buying chemicals companies for the next few years,’ says Bray.

The deal looks innocuous from a regulatory perspective, he says. ‘Adnoc is not currently involved in polyurethanes or polycarbonates,’ Bray explains. ‘It has some exposure via Borouge to ethylene and to propylene chemistries, but there is no real existing overlap between its businesses and that of Covestro.

‘Ultimately this deal tells us that two bad years for the European chemical sector and the relatively deep pockets of oil and gas producers may incentivise some oil and gas makers to buy chemical companies as a way of securing growth for the future,’ says Bray.

‘On the other hand, it also tells us that the chemical assets are still attractive to buyers, who probably know that their profitability is close to its trough.’