Covestro AG (1COV) Earnings Call Transcript & Summary

Welcome to the Covestro Investor Call on the signing of an investment agreement with ADNOC. The company is represented by Markus Steilemann, CEO; and Christian Baier, CFO. [Operator Instructions] For your information, we posted the conference call presentation on our IR website. I assume you have read the safe harbor statement. With that, I would now like to turn the conference over to Markus.

Thank you, Ronald, and a very warm welcome to everyone on the call. I'm very pleased that after thorough and in-depth negotiations, we have signed an investment agreement with entities of ADNOC Group, including ADNOC International Limited and its indirect subsidiary, ADNOC International Germany Holding AG today. Based on the agreement, this morning, ADNOC has published its intention to make a voluntary public takeover offer to all our shareholders. This marks an important day for all of us at Covestro. I'm convinced that we have achieved a win-win situation for both parties. The investment agreement is the result of very intensive and constructive talks and negotiations over the past months. Throughout the process, we have always prioritized the quality of the outcome over speed, so that the investment agreement signed today is in the best interest of all our shareholders, our employees, the company and all other stakeholders. I would like to take this opportunity to thank everyone involved whose hard work and unwavering commitment throughout this journey have been instrumental in reaching this milestone. The reward is now reflected in the investment agreement hand. Let me walk you through the key cornerstones of the strategic partnership. On the financial side, ADNOC intends to make a voluntary all-cash public takeover offer for all outstanding shares of Covestro at an offer price of EUR 62 per share. At completion of the transaction, ADNOC shall subscribe to new Covestro shares at the offer price via an increase of the company's share capital by 10%. This will, at an offer price of EUR 62 per share, result in proceeds amounting of EUR 1.17 billion, which Covestro will use to foster the further implementation of its strategy. We see in ADNOC a strong and long-term oriented partner with whom we will further drive our successful sustainable future strategy, even under the continued challenging market conditions. With ADNOC's support, we will have an even stronger foundation for our sustainable growth in highly attractive sectors and can make an even greater contribution to the green transformation. At the beginning of the talks, we emphasized that our strategy and values are nonnegotiable for us. Then in our discussions, it became clear that ADNOC is absolutely convinced of our current business setup with our 2 business entities, Performance Materials and Solutions & Specialties, our strategic perspective and our vision to become fully circular. ADNOC has assured us of its full support for our sustainable future growth strategy and its further execution. Importantly, this also includes that no sale, closure or significant reduction of Covestro's business activities is planned as part of the transaction. Looking into the governance part. ADNOC has assured us that we will continue to have the responsibility for the operational management and strategic direction of our company. In addition, ADNOC is committed to our company headquarters in Leverkusen, Germany. Covestro's legal form as a stock corporation will be maintained. I can also share from our negotiations that our unique "We are 1" culture, in particular, has left a big impression on ADNOC. Importantly, all this is underpinned by the commitment to maintaining the German governance system, including retaining the co-determined Supervisory Board. Two members of the Supervisory Board on the shareholder representative side will remain independent of ADNOC after the takeover offer has been completed. There will also be no domination and profit and loss transfer agreement. Summing up the transaction details, there are clear benefits to both sides. Covestro will gain access to ADNOC's vast resources and capabilities. ADNOC sees Covestro as the foundational platform of its Performance Materials and Specialty Chemicals business, aiming to become a global top 5 Chemicals player. Based on the comprehensive commitments by ADNOC, we, together with the Supervisory Board, welcome and support the takeover offer. After publication of the offer document, which is to happen within the next 6 weeks, we will carefully review the offer document and issue our reason statement shortly after. We are very much looking forward to the partnership and are convinced that it will enable us to drive the further implementation of our successful sustainable future strategy. Christian will now guide you through more details of the transaction details as set out in the investment agreement. Over to you, Christian.

Yes. Thank you, Markus, and also a warm welcome to everybody from my side. The offer of EUR 62 per share is subject to a minimum acceptance rate of 50% plus 1 share and to other customary closing conditions. This includes a material adverse change provision, merger control, foreign investment control and EU foreign subsidies clearances. The offer represents a 54% premium on the unaffected share price prior to any media coverage of a potential transaction back in June 2023. This is a significantly higher premium than the average takeover premium of 35% to 40% seen in Germany in the past. This again underlines the attractiveness of the offer. As already mentioned, upon completion of the transaction, a capital increase of 10% shall be subscribed by ADNOC against a payment of EUR 1.17 billion at the offer price of EUR 62 per share under a simplified exclusion of subscription rights of existing shareholders. This is in line with the existing authorization from the AGM 2021. The proceeds from the capital increase shall be used to foster the further implementation of Covestro's strategy. Further, the Board of Management, with the support of the Supervisory Board have also decided to not propose a dividend payment until the closing has been completed. In connection with the completion of the transaction, ADNOC will consider delisting Covestro from the stock exchange or approach a squeeze-out. Subject to our fiduciary duties, we, as a Board of Management, together with the Supervisory Board, have agreed to support this plan in principle. It has been crucial to us that our governance structure remains unchanged. Thus, the investment agreement stipulates that even after a potential delisting or squeeze-out, Covestro will continue to be managed as a stock corporation under German law with the same governance as before, hence, a co-determined Supervisory Board and with its registered headquarters in Leverkusen. Thanks to our employees' dedication and commitment to our goal of becoming fully circular, we are today in a strong position to unlock significant value in attractive industries. That is why the interest of our employees are also well protected in the investment agreement. ADNOC explicitly recognizes the existing general works agreements, collective bargaining agreements and the rights of the works councils in Germany. As our intellectual property and technology are cornerstones of our success, the investment agreement also includes an agreement for the long-term protection and expansion of the portfolio and ADNOC's commitment not to seek to transfer Covestro's intellectual property to third parties, including ADNOC. We are delighted to have reached a remarkable joint investment agreement, which runs until the end of 2028. After the details of the investment agreement, let us now look at a potential timeline. Today's agreement marks the beginning of a multistep transaction process. As part of the public takeover offer for all outstanding shares of Covestro, ADNOC International is expected to publish a corresponding offer document after review of BaFin within the next 6 weeks. With the publication, the offer period will be initiated. After its publication, the Board of Management of Covestro and the Supervisory Board will thoroughly assess the full offer document. Both boards will publish their recent statements on the offer shortly thereafter. Subject to the review of the offer document, we currently assume that we will recommend to our shareholders to accept the offer. If the envisaged minimum acceptance rate of 50% plus 1 share is reached by the end of the acceptance period, the remaining shareholders have another 2 weeks to tender their shares into the offer, the so-called additional acceptance period. After this period, the total acceptance of the takeover offer will be known. The closing is the last milestone of the transaction process. Subject to satisfaction of the offer conditions, which I mentioned earlier, we currently expect closing to take place in the second half of 2025. And with that, Markus and I will now be happy to take your questions, and I pass it over to Carsten who will guide us through the Q&A.

[Operator Instructions] And the first question comes from Christian Faitz from Kepler Cheuvreux.

Yes. Hope you can hear me. Three quite technical questions, please. First of all, can you please be a bit more specific about the timelines of the transaction, i.e., how long will the initial acceptance period last in your view? Second, would in your view ADNOC also be happy with less than 50% of shares tendered? Or is the 50% plus 1 share a definite threshold? And third, would you know if ADNOC is free to buy shares in the market at this point in time per the agreement?

Yes. Thank you, Christian, for the questions. Let me just answer them directly. Initial acceptance period, we have spoken about roughly 4 to 5 weeks. This is due to be exactly stated in the offer document, which should be out within the next 6 weeks. There is a 4-week period until which basically that needs to be handed in and then BaFin will review for about 2 weeks. That brings us to 6 weeks. And then we add 4 to 5 weeks of an initial acceptance period, which is going to be very much clarified in the offer document. With respect to the threshold of 50% plus 1 share, this is the agreement that we have jointly concluded on in the investment agreement, and we would, therefore, expect this to also be reflected in the offer document. And with respect to the ability of ADNOC to buy shares in the market, ADNOC is not underlying with the current agreement that we have concluded any limitations of buying Covestro shares.

And the next question comes from Sebastian Bray from Berenberg.

Congratulations on getting this one over the finish line. I have a few questions, please. The first is related to the commitments on the Supervisory Board, recognition of German works agreements and other items referred to in the press release. How is this enforceable? If someone thinks ADNOC is in breach of its conditions, does it go before an arbitration court? And who exactly decides on this? My second question is on reference to the domination agreement not being enacted. Is this a time-limited commitment? Could one, for example, still be enacted in 5 years' time? And my third one is on my understanding of what break clauses or break fees are included within this preliminary agreement. My understanding is that there is some type of EBITDA variation clause. Is there anything worth flagging at this stage in terms of things that could lead the deal to break if something changes or something fundamentally differs either in earnings power or in practice amongst regulators?

Well, Sebastian, that's quite a bunch of questions. So -- but thanks for that. And also thanks to both of you, Christian and Sebastian, for the congratulations. If we're talking about the domination agreement, the overall investment agreement is having a due date until 31st of December 2028. And the domination agreement is not foreseen in the period as long as this domination agreement is in place and -- sorry, that investment agreement is in place. And from that perspective, you could speculate now what would happen after, but I would refrain from speculating what would happen after because my understanding is we had very good constructive and in-depth conversation. And there is also a spirit how the 2 companies would like to work together, which is reflected now for 4 years in this investment agreement. So therefore, from my perspective today, I would not foresee why at a specific point in time, such type of potential domination agreement would be put in place. So on the MAC, I might hand over to Christian, so to explain a bit more the details on that clauses.

Yes, very happy to comment on that. I think there was -- it was just broadly phrased. As I mentioned in the speech line, there is a material adverse change regulation in the document, which will prevail during the period of the acceptance. We see that as a reasonably broad setup that we have there and currently do not foresee that there will be a violation of that. And there will be further details in the offer document of the relevant topics there. It is a EUR 400 million EBITDA deviation that would be required in all the fiscal years '24, '25 and '26.

Yes. And last but not least, also with regard to the setup, German governance setup Supervisory Board, any dispute, let's say, under the agreement that could not be settled amicably would go to arbitration.

And the next question comes from Geoff Haire from UBS.

Congratulations on what must have been a tough process. Just wanted to wonder whether you could talk a little bit about what antitrust agreements you need, particularly the regions you need them in? And also, does Germany need to sign off this from a strategic point of view as well? I may have missed this because my mic went during the prepared remarks. So I'm sorry if I'm repeating stuff you already said.

Yes, Jeff, thanks for your question. I would just comment in general with regard to the regulatory procedures. As mentioned, there is basically 3 elements. There is that merger control piece. There is a foreign direct investment perspective, and then there is foreign subsidies regulation, which is pertaining to the EU market. In all those 3 elements, there is a multitude of filings that are required. We have individually, but also in close collaboration with ADNOC worked on those already and are well prepared from a team perspective to be filing ASAP on all of those elements and are, therefore, confident that we will be able to run through those processes in an as efficient and speedy process as possible, given that we are also depending, obviously, on debt and time lines of the various authorities.

And can you say what the main regions you need approval in are?