Bayer Sells Off Another 9.4% Stake in Covestro for €1.2 billion; Where is the Industry Heading?

The chemical industry is undergoing consolidation to survive in changing market dynamics. While the reduced crude oil prices have resulted in cost-saving based competitive market restructuring, the agrochemical business is moving toward consolidation as never seen before. Bayer is one of the prominent companies, which is realigning its businesses with the ongoing Covestro separation and the Monsanto acquisition.

Bayer further sold 9.4% of its stake in Covestro for €1.2 billion earlier this (last) week. The sale was carried out in private institutional placement at a 3.7% discount to the market closing price on that day.

The step is in accordance with Bayer’s commitment of increasing the independence of Covestro as an organization. The sale is expected to help Bayer in funding their proposed $66 billion acquisition of Monsanto. Meanwhile the European Union has initiated a competitive investigation on the proposed Monsanto and Bayer deal with current deadlines of January 8, 2018.

On the other side, despite decreased stake, Covestro would still fully reflect in Bayer’s consolidated financials as it has de facto majority in Covestro with additional indirect stake via Bayer’s pension funds.

Covestro, which was ranked among most innovative companies of 2017, has been delivering novel improvised materials for various applications. They have major exposure in polyurethanes and polycarbonates.

Further increasing independence is expected to help it in increasing its strength across segments. For example, the polyurethane foam segment used in mechanical and acoustic foam insulation is expected to see higher penetration even in relatively untouched markets. The organization is expected to witness higher growth in other segments as well.

Bayer

Established on August 1, 1863, Bayer is headquartered in Leverkusen, Germany. As of 2016, it had 115,200 employees with more than half of the employment in Europe/Middle East/Africa region. The company is focusing on life sciences activities following the stock market floatation of Covestro in September 2015. Covestro is currently fully consolidated within the financials of Bayer with its de facto direct and indirect stake ownership. The company is targeting full separation from Covestro in mid-term. The activities of the company can be segmented across four major segments of Pharmaceuticals, Consumer Health, Crop Sciences, and Animal Health. In December 2016, Bayer announced an acquisition deal worth $66 billion of the global seed and agrochemical leader Monsanto.

Covestro

After becoming an independent entity by September 2015, the organization proved its worth through a large employee strength of 15,600 and posted strong growth in 2016. The company operates through three major segments of polyurethanes (PUR), polycarbonates (PCS) and Coating, Adhesives & Specialty (CAS). It produces raw materials serving various industries including automotive, construction, textile, packaging, medical, wood & furniture, sports, and cosmetics. The company has its presence across geographies with production and sales in regions of North America, Europe, Middle East & Africa, and Asia Pacific.

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