For years, the chemicals trader has typically been buying up small to medium-sized distributors in high-growth regions or in lucrative segments.
(Photo: dapd)
Dusseldorf, Frankfurt
The plans for a major merger between two chemical dealers have failed. Essen-based global market leader Brenntag and number two Univar have ended their merger talks. Brenntag wanted to take over the US group with a market value of more than five billion dollars, but encountered sharp criticism from its shareholders.
Investors reacted with relief to the end of the talks: Brenntag shares rose by around five percent to EUR 63.60 on Tuesday morning. According to Univar, Brenntag ended the negotiations on its own initiative.
The US group now wants to continue talking to other interested parties, who are likely to come primarily from private equity funds. Univar investors had also criticized a takeover by Brenntag.
There was no further comment from the Dax group by Tuesday afternoon. In industry and financial circles it was said that the resistance of individual shareholders would not have led to the withdrawal alone. The timing of the takeover was disadvantageous in view of the uncertain situation in the chemical industry. In addition, there were antitrust challenges in the potential merger.
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On the customer side, there were also concerns about the resulting market power, it said. Brenntag would have become by far the largest chemical distributor in the world. After a merger with Univar, the company would have increased its sales from 19 billion to around 30 billion euros. Hamburger Helm AG, number five in the industry, has a turnover of just over six billion euros.
Worry about expected market share losses
Brenntag would have had to stretch itself financially for the purchase. Including a usual premium on the share price and the assumption of debt, the entire transaction could have reached a volume of eight billion dollars.
When the plans became known at the end of November, the Brenntag share price had fallen by nine percent. Shareholders feared a capital increase to finance the Univar purchase.
>> Also read: 2023 will be a fateful year for the German chemical industry
Shortly before Christmas, the hedge fund Primestone, which holds around two percent of Brenntag, voiced public criticism of the project. The risks of the purchase would far outweigh the benefits, they wrote in a 19-page letter to the board of directors, which is available to the Handelsblatt. Although there is a “strategic basis”, the expected synergies could not be achieved, it said.
Primestone justified its concerns primarily with the expected loss of market share among customers. Manufacturers such as Unilever or Danone wanted to have several suppliers for reasons of security of supply, the hedge fund argued in the letter. Large chemical manufacturers, on the other hand, did not want to make themselves dependent on a large service provider and would probably have given business to smaller distributors after the merger.
Among analysts, on the other hand, there were many positive voices for the takeover plans. JP Morgan analyst Chetan Udeshi saw great earnings and value upside potential. Only the timing of the transaction is not ideal due to the uncertain profit prospects for Brenntag 2023.
Brenntag CEO Christian Kohlpaintner had named the USA as an attractive target for further growth.
(Photo: Brenntag)
Brenntag should now return to its proven growth strategy. For years, the Essen-based company has typically been buying up small to medium-sized distributors in high-growth regions or in lucrative segments. The group is thus expanding its strength in being able to serve customers all over the world with local networks.
At the Capital Markets Day in November, CEO Christian Kohlpaintner named the USA as an attractive target for further growth. With Univar, he would have succeeded in a large-scale expansion there in one fell swoop.
The US chemical market is considered to be growing strongly because of the low energy prices and the government’s economic incentives worth billions – unlike Europe.
Hedge fund calls for Brenntag to be split up
The hedge fund Primestone wants to put the Essen-based company under pressure even after the talks have been broken off. In the letter to management, investors called for investing money in a large-scale share buyback. This should drive the share price higher. In view of Brenntag’s market opportunities, the analysts at UBS currently also consider the valuation on the stock exchange to be too low.
In addition, the hedge fund calls for the group to be split up, more precisely for the specialty chemicals division to be separated from the bulk chemicals business into two independent companies. Such a step is considered unlikely in industry circles.
Brenntag founded these two new divisions as part of the change in strategy implemented by CEO Kohlpaintner. In this way, the group wants to be able to serve the different customer needs better.
More: 2023 will be a fateful year for the German chemical industry