(Reuters) Abu Dhabi's ADNOC has struck a deal to buy German chemicals maker Covestro for $16.3 billion, including debt, in the energy giant's biggest ever acquisition.
The deal is one of the largest foreign takeovers by a Gulf state as countries in the region seek to reduce their dependence on oil amid the global switch to cleaner energy.
It also comes at a sensitive time in Germany for foreign acquisitions, as Commerzbank and the government seek to fend off interest in the bank from Italy's UniCredit.
The 68 dollars-per-share cash deal, which will also see ADNOC take on about $3.3 billion in debt, follows protracted negotiations and is a cornerstone of the energy giant's drive to grow in petrochemicals along with gas and renewable energy.
ADNOC said that when the transaction closes it would also buy $1.3 billion worth of new shares in Covestro to improve funding at the former Bayer unit.
"We believe that the fundamentals of chemicals are strong," Khaled Salmeen, ADNOC head of downstream, marketing, and trading, told Reuters, adding he saw Covestro as a platform for growth.
"This sector, and specifically Covestro's space in the sector, will grow higher than GDP from now to 2050," he added.
Shares in Covestro, which makes plastics and chemicals for the automotive, construction, and engineering sectors, jumped 3.7% to a three-year high of $64.
ADNOC has also been in talks with Austria's OMV to merge their petrochemical joint ventures Borealis and Borouge. ADNOC took a 24.9% stake in OMV from Abu Dhabi sovereign fund Mubadala in February.
Covestro was created in 2015 after being spun off from Bayer. It opened its books to ADNOC in June - a year after ADNOC's initial interest was reported.
The takeover offer will be subject to a minimum acceptance threshold of 50% plus one share of Covestro's capital.
"The long negotiations have paid off - both for Covestro and for the shareholders. The deal is well structured and now has a good chance of coming to a successful conclusion," said Arne Rautenberg, a fund manager at Union Investment, one of Covestro's top-15 shareholders.
Limits to control
The deal could stoke a debate in Germany about foreign takeovers of blue-chip companies amid a weak economy.
ADNOC, however, granted some autonomy to Covestro.
Covestro said that half of the seats on its supervisory board would continue to be held by labour representatives, as is the norm at German listed companies, and two members of the board's shareholder representatives would be independent of ADNOC.
ADNOC pledged not to sell, close or significantly reduce Covestro's business activities and to protect its technology and intellectual property, Covestro said.
The German company added its management board would stay in charge of management and strategic direction, and Covestro CEO Markus Steilemann told Reuters he planned to serve out his contract running until 2028.
"I believe this is the right step not only to keep Covestro on a growth path but also to move it to the fast lane," Steilemann said of the deal.
Covestro reported a net loss of $79.5 million in the first six months of the year, versus a $50.8 million profit a year earlier.
The agreement highlights an increase in dealmaking between the Middle East and Europe as Gulf investors are drawn to company valuations that lag those in the United States, as well as an easier regulatory backdrop for buyers and a generally warmer welcome because of investment needs, advisers and analysts have told Reuters.
It is the Middle East's second biggest acquisition after Israel's Teva Pharmaceuticals' purchase of Allergan's generic drugs business for around $40 billion in 2015, according to Dealogic data.
The deal also follows several failed bids by Emirati companies to buy foreign targets.
Abu Dhabi utility TAQA's $22 billion attempt to buy Spain's Naturgy collapsed earlier this year, partly over disagreements on governance, people with direct knowledge of the talks said.
Britain also blocked an Abu Dhabi-backed group's plan to buy the Telegraph newspaper, and only cleared Abu Dhabi state-controlled telecoms firm e&'s purchase of a 14.6% stake in Vodafone after ordering the UK company to take steps to manage national security risks that the government said the deal posed.
Covestro said its management board was advised by investment banks Goldman Sachs and Perella Weinberg as well as by law firm Linklaters. Its supervisory board was advised by Rothschild & Co and Macquarie Capital as well as by law firm SZA Schilling, Zutt & Anschuetz.
ADNOC said Morgan Stanley exclusively provided financial advice while Freshfields Bruckhaus Deringer was its legal adviser.
