ADNOC seeks to expand assets with Covestro, Braskem, Borealis, Borouge

Abu Dhabi National Oil Co. (ADNOC) is looking to expand its plastics and chemicals assets through deals involving materials firms Covestro, Braskem, Borealis and Borouge.

Phil Karig, managing director at Mathelin Bay Associates in St. Louis, said that ADNOC "has been following a strategy of seeking to diversify downstream from oil and gas production to chemicals and polymers for over two decades."

"The primary goals of these investments are to seek higher margins than in refining and ideally to facilitate employment-generating opportunities in the United Arab Emirates," he added.

"While these goals are still in place, recent investments in ADNOC from private equity powerhouses such as BlackRock have encouraged ADNOC to focus more on margin enhancement and return on investment."

On July 18, ADNOC—a state-owned energy firm—increased its bid to acquire Covestro to almost 11 billion euros ($12.3 billion), according to a Reuters report.

Covestro AG reportedly rejected a $11 billion offer in June from ADNOC, with market watchers saying that price was too low. Neither company has commented publicly.

ADNOC "may need to go higher still to win over Covestro," market analyst Ben Kelly told Bloomberg News on July 19. Kelly, who is with Louis Capital Markets in New York, added that Covestro "knows ADNOC can afford to pay up, so I think they'll be patient."

He also said that an improved offer of 61.5 euros ($68.30) per share would equate to eight times earnings and, in his firm's opinion, "would be more likely to be accepted by the Covestro board."

A July 6 article from website Simply Wall Street said that Covestro "is still trading at a fairly cheap price" and that the site's valuation model shows that the intrinsic value for the stock is almost 69.40 euros ($77.10) per share.

ADNOC's interest has impacted Covestro's stock price. The price was at 40.30 euros ($44.80) on June 19 but had increased to 49.10 euros ($54.60) in early trading July 21, an increase of almost 22 percent. The most recent ADNOC bid values Covestro at about 57 euros ($63.35) per share.

A June 20 Reuters story said that acquiring Covestro would give ADNOC access to more advanced materials for electric vehicles and thermal insulation for buildings, as well as coatings, adhesives and engineering plastics.

Covestro is based in Leverkusen, Germany, and has U.S. headquarters in Pittsburgh. The company is a global supplier of polycarbonate resins and films, thermoplastic polyurethane, PU materials and foams, and other specialty chemicals and materials. The firm employs almost 18,000 and posted sales of $19.6 billion in its 2022 fiscal year.

Meanwhile, ADNOC also is looking at potential acquisitions that would involve commodity resins.

On July 19, officials with Brazilian state-run oil company Petrobras said the firm will analyze all offers presented for Braskem. They added that discussions on a potential sale of Braskem—a major polypropylene resin maker—are "far from over."

Petrobras CEO Jean Paul Prates made those comments at an event in Rio de Janeiro. The firm reportedly has received three offers for controlling interest in Braskem: a joint bid from ADNOC and financial firm Apollo Management, and separate proposals from Brazilian firms Unipar Carbocloro and J&F.

As with Covestro, ADNOC's interest has affected Braskem's share price. The price was at $8.80 on May 31 but had reached $10.20 in early trading July 21, an increase of almost 16 percent.

Braskem, which is based in Sao Paulo and has a U.S. headquarters in Philadelphia, is Brazil's largest petrochemicals firm. In addition to its position in PP, the firm is a major supplier of bioplastics.

In a third potential deal, ADNOC and Austrian oil and gas firm OMV AG have confirmed their efforts to merge materials firms Borealis and Borouge. OMV officials said a merger would create "a global polyolefin company with a material presence in key markets."

OMV currently owns 75 percent of Borealis, with ADNOC owning the remaining 25 percent. Borealis in turn owns 54 percent of Borouge, with ADNOC owning 36 percent of that firm. Institutional investors won the remaining 10 percent of Borouge.

Borealis is Europe's second-largest polyolefins maker and eighth in that market worldwide. The firm employs almost 7,000 and posted sales of 15.8 billion euros ($17.6 billion) in 2022.

Borouge is a major producer of polyethylene and polypropylene resins and related feedstocks. The firm operates a massive complex in Ruwais, United Arab Emirates. When the fourth expansion of that site is completed in 2025, it will have more than 14 billion pounds of annual PE and PP production capacity, making it the world's largest single-site polyolefin facility.