LONDON (ICIS)--Covestro shares jumped on Friday as US investment fund Apollo could be eyeing a takeover of the German chemicals major, although the probability of a deal is still very low, according to chemicals equity analysts.
Covestro’s shares rose nearly 10% in Friday morning trading although they were on course to close trading with an increase of around 5%.
Apollo would be eyeing to take over Covestro's full capital structure in a $10bn transaction, according to Bloomberg late on Thursday, citing unidentified sources familiar with the matter.
European chemicals equity analysts have said the transaction would make sense considering Apollo’s deep pockets and experience in petrochemicals acquisitions.
Following the 2008 financial crisis, Apollo acquired a stake (28.8%) at US major producer LyondellBasell.
Covestro, headquartered in Leverkusen, produces polycarbonates (PC) and polyurethanes (PU), among other materials.
It posted second-quarter falling sales and earnings on the back of pandemic-induced lockdowns, but analysts have said it would be one of the first companies to recover.
“Covestro would fit into Apollo’s hunting scheme – it is a producer which has known good cash flow, and earnings are at the trough so the timing would make sense,” said Baader Bank’s analyst Markus Mayer.
“Covestro has already done a lot of restructuring and are already by far more efficient than many other chemicals companies; I am not sure how much a private equity company [Apollo] could restructure further.”
However, the jump in the stock on Friday automatically made Covestro more expensive, which in the end may end up working against a potential transaction.
Warburg Research analyst Oliver Schwarz said that the takeover could “fizzle because the rumour came out too early” although he said Covestro would be still undervalued after the heavy falls in March-April.
“This is more or less a story of Apollo taking on an interesting asset that they envisage is undervalued, taking it out of the market for two-three years and bringing it back at a significantly higher price,” said Schwarz.
Covestro had not responded to a request for comment at the time of writing.
Apollo refused to comment.
While investment funds tend to take over companies to often divide them and sell the different divisions, with short-term expectations focused on a quick return, analysts think this time round Apollo may have different intentions.
“I can see Apollo’s angle as they had a very illustrious past with regards to making a huge amount of money in acquisitions in petrochemicals, especially in polyols; however, this is not what is driving the Covestro story,” said analyst Oliver Schwarz of Warburg Research.
“LyondellBasell and Covestro are active in petrochemicals and both companies are active in PU, but that is where the resemblance really stops everything else is different.”
The pandemic has brought several headwinds to the chemicals industry, but Covestro seems to be weathering the storm well.
That makes it unlikely it would need investors to bail it out from under any financial burdens, said the analysts.
Even without taking into account Covestro’s shares jump on Friday, investors’ confidence in the firm’s stock has been gaining traction after the sharp falls in March, when the pandemic hit Europe.
The producer’s CEO Markus Steilemann has also said third-quarter financial results are tipped to be better than initial expectations.
“Covestro has made a huge run from the low point, in March where share prices were somewhere around €25/share. Now we are talking about a company that is trading almost double that price,” said Schwarz.
“This not only reflects hope of financial recovery but also a better performance in the second quarter, most likely the benefit of a tailwind of production issues led to a tight market, subsequent higher prices and inflated company margins for the short term.”
Competitors struggling with production issues in the toluene diisocyanate (TDI) market could have been a key component of Covestro’s portfolio providing buoyancy but is not the only positive indicator going forwards.
Mayer added that tailwinds could also come from restocking of polycarbonate (PC) as inventory levels in the automotive industry are relatively low.
Covestro’s recent strong performance on the stock market may even be the factor which diminishes the prospect of Apollo taking over the producer.
Mayer placed the probability of the transaction finally happening at around 30%.
“It’s not zero, but it is not at 50%. However, private Investment takes a longer view than the corporate market thinking one quarter to another so this could be a fair as a mid to long term strategy for Covestro,” said Mayer.
Covestro share price year to
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Front page picture: Covestro's headquarters
Focus article by Morgan Condon