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

The crop is seen in a wheat field ahead of the annual harvest near Moree, Australia, October 27, 2020. REUTERS/Jonathan Barrett/File Photo/File Photo

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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(The author is a Reuters Breakingviews columnist. The opinions expressed are their own.)

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