BASF in Talks to Merge Oil Unit With Fridman's Dea, Sees IPO

(Bloomberg) -- BASF SE said it’s in talks to combine its oil-and-gas unit with the energy company controlled by Russian billionaire Mikhail Fridman, setting the stage for one of the largest deals in the sector for some time.

The German chemicals company would hold a majority in the combined entity, with a view to a possible initial public offering “in the medium term,” BASF said in a statement after Bloomberg News reported that the two sides were in talks. Discussions between BASF’s Wintershall AG unit and Fridman’s Dea Deutsche Erdoel AG are advanced and the combined entity could be valued at more than 10 billion euros ($12 billion), according to people familiar with the talks, asking not to be identified as the information is private.

BASF rose as much as 3.1 percent in Frankfurt trading, the most among the 30 largest companies on the DAX index. The deal would see two of Germany’s largest oil and gas businesses brought together. Fridman, Russia’s sixth-richest man, used his L1 Energy vehicle to acquire Dea from German utility RWE AG for 5.1 billion euros in 2014. At that time, BASF was also in the running for the unit.

“Investors are likely to warmly welcome the rumored tie-up, which could indicate a longer-term exit by BASF from the oil and gas business,” said Sebastian Bray, an analyst at Berenberg in London. Its association with the energy industry is one of the reasons why BASF has typically traded at a large discount to peers, he said.

BASF said the outcome of the discussions is open and that there can be no assurance of a transaction. Shares of the world’s largest chemical company rose as much as 2.88 euros to 95.29 euros in Germany, and traded at 94.89 euros at 2:05 p.m. in Frankfurt. The stock has advanced 7.4 percent this year, half the gain of the DAX Index in the period.

Possible IPO

The parties plan to agree on a transaction within the coming days or weeks though discussions, the people said. BASF said it won’t make any more comments at the moment.

Energy deals have picked up pace more broadly in recent months as the industry puts the worst of the slump behind it. Total SA agreed to buy the oil and gas unit of A.P. Moller-Maersk A/S in August, the French company’s biggest acquisition since 1999.

Combining with BASF would signal the end of Fridman’s plan to expand his L1 Energy venture independently. In 2015, he hired former BP Plc chief John Browne as executive chairman of L1 Energy.

Portfolio Clean-Up

BASF Chief Executive Officer Kurt Bock is brushing off an oil-and-gas project that BASF has had on its shelves for years. A Wintershall transaction would follow a recent agreement to enter the genetically modified seeds business by buying assets from Bayer AG for $7 billion, extending Bock’s current drive to overhaul BASF’s portfolio.

Now in his eighth year at the helm, Bock will be keen to show he too can enact change given the seismic moves elsewhere in the chemical industry that’s created merged companies like DowDuPont Co.

BASF purchased Wintershall in 1969. It soon became a counterweight to volatile prices for the feedstock consumed by its cracker, which manufactures the chemicals for making pesticides to plastics at its sprawling flagship Ludwigshafen complex. Last year,
BASF’s oil and gas segment accounted for about 2.8 billion of net sales, while EBITDA was about 1.6 billion euros, according to the company.

Wintershall has oft been the star performer in BASF’s portfolio, propping up profit when demand for chemicals is subdued. Its contribution shrank in the recent oil price crash. Typically, a $1 a barrel fall in oil prices cost BASF about 20 million euros in annualized earnings before interest and taxes, Berenberg’s Bray said.

BASF transformed Wintershall in October 2015, when it swapped the unit’s trading business with Gazprom in return for stakes in Siberian gas fields. The swap meant Wintershall’s revenue shrank to 2.8 billion euros last year from 13 billion euros in 2015. But the focus on exploration and production saw its profitability rise nearly threefold to an operating margin of 57 percent. With earnings of 1.6 billion euros before interest, taxes, depreciation and amortization, the unit could be worth 11 billion euros.

“An exit from oil and gas would also remove any potential impact of a long-term oil price decline triggered by the rise of electric vehicles,” Bray said.

To contact the reporters on this story: Dinesh Nair in London at dnair5@bloomberg.net, Eyk Henning in Frankfurt at ehenning1@bloomberg.net, Andrew Noël in London at anoel@bloomberg.net.

To contact the editors responsible for this story: Aaron Kirchfeld at akirchfeld@bloomberg.net, Will Kennedy

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