The Urethane Blog

Covestro IPO Update

Bayer chief remains optimistic over Covestro IPO plans

Jeevan Vasagar in Berlin


Covestro AG, the former Bayer AG MaterialScience business, has officially adopted its new name. The company is now legally and economically independent, but will remain a 100 percent subsidiary of Bayer for the time being.

Bayer is floating Covestro, formerly known as its Material Science division

The chief executive of Bayer’s plastics unit Covestro defended plans for an initial public offering, despite volatile stock markets, saying he was “optimistic” about growth rates in the industry.

The Bayer unit is aiming to raise gross proceeds of €2.5bn with a listing in Frankfurt.

Patrick Thomas, Covestro CEO, said: “Most of the IPOs that come out after a period of famine are the highest-performing IPOs.”

Covestro’s earnings have surged this year as lower raw materials costs and favourable currency effects made up for a decline in selling prices.

In the second quarter, the Bayer unit’s earnings before interest, tax depreciation and amortisation rose from €270m in the previous year to €506m this year.

The business, formerly known as Bayer MaterialScience, makes products ranging from foam for mattresses and insulation panels to high-tech plastics for cars.

Speaking at a press conference in Frankfurt on Monday, Covestro’s chief said there had been a “positive upswing” in the first half.

The executive said that while consumer demand in China had been affected by a loss of confidence, and the housing sector was oversupplied, he believed Covestro was shielded from these risks because it supplied a number of industrial sectors.

Mr Thomas said: “We see China as taking a small wobble during a period of uncertainty.” The chief executive added that China only accounted for 15 per cent of Covestro’s sales.

Covestro benefits from industry trends such as the move to reduce the weight of cars by replacing metal parts with plastics, Mr Thomas said. He also anticipated growth in the polyurethane foam business, which makes up about half of Covestro’s sales, from retrofitting buildings with insulation.

Covestro will use proceeds from the flotation to repay debt to Bayer, increasing the parent company’s ability to invest in life sciences.

Bayer is listing the unit in a decisive shift away from its roots in chemicals to focus on life sciences, a business that offers higher returns on capital than plastics. The float will dilute Bayer’s stake, potentially to as low as 60 per cent depending on the number of new shares sold.

Covestro will be left with net financial debt, including pensions, of €4bn after the IPO, according to chief financial officer Frank Lutz.

This is 2.5 to 3 times Covestro’s forecast adjusted ebitda for 2015. The plastics business, which had revenues of €11.8bn and ebitda of €1.16bn last year, plans a dividend payout of 30-50 per cent of net income.

Shares in Covestro are priced at between €26.50 and €35.50 each. The subscription period opened on Monday and will run to October 1.

Trading will start in Frankfurt on October 2. Deutsche Bank and Morgan Stanley are acting as joint global co-ordinators for the IPO, together with Bank of America Merrill Lynch, Citi, Credit Suisse, JPMorgan and UBS as joint bookrunners.