Germany's BASF has approached smaller peer Evonik over a possible takeover that could strengthen its portfolio as European companies face tough competition from China.
BASF said it continuously evaluates "the strategic option of acquisitions that strengthen its core businesses, deliver a strong strategic fit, drive profitable growth and create value" and was in exploratory talks.
Evonik said earlier it had "received a non-binding approach from BASF regarding a voluntary public takeover offer for all shares of the company".
RAG Foundation, which holds 43% in Evonik, also said it had been contacted by BASF regarding a takeover offer for Evonik.
BASF has a market capitalisation of €45.8 billion ($52.2 billion), while Evonik is currently valued at €9.2 billion.
"Evonik's comparatively low valuation makes it an attractive potential partner," said Linus Vogel of Deka Investment, a top-20 investor in both companies.
"For BASF, active consolidation would be a logical response to the structural weaknesses of the European market," Vogel added.
Evonik's complementary product range
Evonik's products include high-tech plastics, feed additives as well as ingredients for coatings and household products, while BASF makes engineering plastics, super absorbent polymers, vitamins and a wide range of chemicals for industrial uses.
Arne Rautenberg, head of equities at mutual-funds firm Union Investment, said there was a sound business case for a deal.
"By acquiring Evonik, BASF could strengthen its position in the speciality chemicals sector and increase capacity utilisation," Rautenberg said.
Geographically, however, the companies are less complementary.
Europe is the largest market for both and BASF has pledged to increase revenue contributions from Asia and other regions.
The company, along with the rest of the European chemicals sector, has been held back by rising energy costs and weak demand.
CEO Markus Kamieth said in June that the business environment was at its most difficult in at least the last 25 years, with the global balance of industrial power shifting to Asia.
BASF is at risk of losing its years-long rank as the world's largest company by chemicals revenue to China's Sinopec (600028.SS), opens new tab.
Last year, BASF's group revenue of €59.7 billion ($68.9 billion) was almost the same as that of the chemicals segment of China's Sinopec.
European chemical producers have, however, received a temporary boost because Asian rivals are hit harder by supply disruption linked to the US-Israeli war on Iran.
Kamieth has been seeking to make BASF more focused and to exit or separate businesses that are not closely integrated and physically connected within the group's chemical plants across the globe.
