Breakingviews - ADNOC has upper hand in $30 bln plastics M&A - Reuters

ADNOC has upper hand in $30 bln plastics M&A | Reuters

ADNOC has upper hand in $30 bln plastics M&A

LONDON, July 24 (Reuters Breakingviews) - A merger of two companies can be a headache; a merger of two countries even more so. The state-owned Abu Dhabi National Oil Company (ADNOC) and $15 billion OMV (OMVV.VI), 32% held by the Austrian state, are in talks to merge the two petrochemical companies they cross-hold, Borouge (BOROUGE.AD) and Borealis, into an entity that would be worth over $30 billion. The complex ownership structure and the involvement of two governments make it intriguing to see who holds the whip hand.

Borealis and Borouge's shareholder structure is complex. ADNOC owns 54% of Abu Dhabi-listed Borouge, while 36% of the same company is held by Borealis, with other investors accounting for the other 10%. Meanwhile ADNOC owns 25% of Borealis, while OMV holds the other 75%. The upshot of the cross-shareholdings is that OMV holds a direct majority stake in Borealis and an indirect 27% minority stake in Borouge, while ADNOC holds a direct minority stake in Borealis and 63% overall of Borouge.

The market values Borouge at $22 billion. Strip out Borouge's dividend, and Borealis would be worth $10 billion, Deutsche Bank reckons. ADNOC’s 63% Borouge stake and 25% Borealis stake are thus worth $14 billion and $2.5 billion respectively; OMV’s 27% Borouge stake and 75% Borealis holding are worth $6 billion and $7.5 billion. The upshot is that ADNOC would have 55% and OMV 45% of the merged entity.

Strategically, it all makes sense. Goldman Sachs analysts estimate the combined group will annually produce 8.8 million tonnes of polyolefin, used to make plastics that surround power transmission cables connecting wind farms, and also to shield medical devices like inhalers. Borealis makes the chemical particles which Borouge processes into plastic products. The combined entity would be one of the world’s top producers of polyolefin alongside China's Sinopec and Saudi Arabia's SABIC (2010.SE). Electrification and healthcare are booming sectors, and Borouge makes over half of its sales in fast-growing Asian countries like India.

The headscratcher is who controls the group. OMV would need to inject more than $3 billion to hike its stake from 45% to above 50%. Yet ADNOC may not want that. The combined group would face a dilemma over where it lists - a dual listing in both countries is possible but costly, and the group would have to cater to two regulatory regimes.

Abu Dhabi is keen to grow its gas exports to Europe, so may not want to annoy Vienna too much. But beyond that OMV doesn't have that many cards to play. ADNOC, after all, also owns 25% of its shares. More importantly Borouge’s 33% EBITDA margins, which double rivals like SABIC, are in part enabled because it gets cheap gas and oil from ADNOC as feedstock for its polyolefin. That may decide any trans-continental chemical standoff in Abu Dhabi’s favour.

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CONTEXT NEWS

Austria's OMV said on July 14 it will enter negotiations with Abu Dhabi National Oil Co (ADNOC) to combine two entities, Borouge and Borealis, in which both companies own stakes.

The deal, if realised, would include a merger of petrochemicals group Borealis - which is owned by OMV and ADNOC in a 75:25 split - and Abu Dhabi-listed Borouge, which is 54% owned by ADNOC and 36% by Borealis.

Under the plan, OMV said both Borealis and Borouge would become "equal partners under a jointly controlled, listed platform for potential growth acquisitions to create a global polyolefin company".

ADNOC said it is "undertaking these negotiations as majority shareholder of Borouge", and OMV as majority shareholder in Borealis, with "any final decision subject to Borouge’s, and other relevant parties’, governance processes".

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