Some chems M&A will prove to be bad deals in overheated market – Covestro CEO

COLOGNE, Germany (ICIS)–The current valuation multiples for mergers and acquisitions (M&A) targets in the chemicals sector are too high and some deals struck at recent rates may not be seen as value-creating in future, according to the CEO of Germany-based chemicals major Covestro on Tuesday.

With cash flow swelling on the back of what the company refers to as fly-up margins for toluene di-isocyanate (TDI) in 2017, Covestro is continuing to scan the market for acquisition opportunities, particularly for its less strongly performing coatings and adhesives division, but

“There are a lot of acquisitions going on at the moment that I think in the course of time people will not see as value creating [as] the multiples that are available at the moment are so high,” said Covestro’s CEO Patrick Thomas at a press conference.

Access to cheap finance and low interest rates has fuelled a rush of M&A activity in recent years, but once the cost of capital starts to ratchet back up the economics of some acquisitions may become tougher to justify, according to Thomas.

“People forget that they have got to live with the cost of that acquisition for the future. Just because money is cheap doesn’t mean multiples should be high and you can do a value-creating acquisition,” he added.

The company instead siphoned some of its windfall into a €1.5bn share buyback and by paying down €1.2bn of loans, cutting its net debt to earnings before interest, taxes, depreciation and amortisation (EBITDA) level to 0.4 times (x) compared to 1.3x at the end of 2016.

“When we looked at all the things that were available to us, the best thing we could invest in our stock, because it is undervalued,” Thomas added.

So far, the company has purchased back four million shares, representing around 2% of existing capital stock, with up to 10% to be purchased back in total in the current tranche of share repurchasing, according to the CEO.

The pace of the buy-back is determined by the proportion of the company’s issued share capital in free float, but a series of sell-downs by Bayer, most recently in January 2018, reduced the former owner’s stake from 25.6% to 14.2%, plus an 8.9% holding by the Bayer Pension Trust.

This is likely to allow Covestro to increase the pace of the buyback, according to Thomas.

A vote on an additional tranche of buybacks will be taken at the company’s annual general meeting in 2019, he added.

The German company published earlier on Tuesday its fourth-quarter and full-year financial results, showing its polyurethanes (PU) division posting record numbers on the back of a healthy global economic backdrop.

Pictured: Covestro’s corporate headquarters in Leverkusen, Germany
Source: Covestro