Brenntag’s U.S. swoop is both logical and risky

Univar Solutions

28/11/2022 12:55

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are their own.)
       LONDON, Nov 28 (Reuters Breakingviews) - German chemical
distributor Brenntag  BNRGn.DE  is eyeing $5 billion U.S. rival
Univar Solutions  UNVR.N . A deal would offer the $10 billion
group scale in a fragmented market, and greater exposure to
North America. But it also carries risks. 
    There’s good reason for more M&A in a sector that blends
chemicals and transports them from manufacturers to customers
like carmakers or drug companies. It’s still relatively
fragmented, with the top six players accounting for just 12% of
sales. A deal would offer synergies and scale, and give Brenntag
more exposure to North America. That market may be more
resilient to Europe’s energy crunch, and it made up nearly 70%
of Univar sales in 2021. 
    If Chief Executive Christian Kohlpaintner pays $40 a share,
a roughly 30% premium, he would value his quarry at $8.6 billion
including debt. Assume cost savings of perhaps $500 million, and
Brenntag would reap some $905 million of net operating profit
after tax and synergies in 2023. That would deliver
a comfortable 10% return on invested capital, in line with
Univar’s cost of capital.  
    Still, the news sent Brenntag’s shares down some 9% on
Monday. A deal would be bigger than the bolt-on transactions
expected by investors and may require some equity issuance. Any
mega-deal looks risky on the eve of a downturn. And given the
healthier U.S. market, there’s a risk Brenntag gets stuck in a
bidding war – or ends up overpaying. (By Neil Unmack) 
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 (Editing by George Hay and Oliver Taslic)
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