TheChek News Flow

Adnoc’s cash has good chemistry with struggling German industry

Deal may provide a test case for other Middle Eastern investors scouring the world for opportunities

Middle Eastern oil and gas companies are flush with cash. European industry is on its knees. That creates the conditions for strong chemistry, aka a spot of dealmaking.

That is one way to read Abu Dhabi National Oil Company’s €14.7bn swoop on Germany’s Covestro. The chemicals group, which was spun out of Bayer in 2015, has recommended the offer after a protracted negotiation. This marks the largest cash deal in the chemical industry, and the first big takeover of a Dax 40 company by a Gulf state.

It is hard to fault Covestro for capitulating. It is getting a 54 per cent premium to its undisturbed share price, before rumours surfaced in June 2023. And the transaction values the business at 9 times 2025 ebitda, on Berenberg estimates. Troubled German peer BASF is trading on 7.5 times according to S&P Capital IQ.

True, Covestro is selling out somewhere near the bottom of a long chemicals downcycle. But, in the beleaguered European chemicals sector, faith in a recovery is thin on the ground. Covestro’s acceptance of the deal surely implies that a steep resurgence is unlikely, at least for the foreseeable future.

Moreover, these businesses need to invest in order to grow — ideally countercyclically, when materials are cheap and construction groups sit idly. Yet Covestro, with €3bn of net debt and pension liabilities, or more than 4 times ebitda in the 12 months to June, has little cash to spare. Adnoc’s commitment to inject €1.2bn of additional equity will have helped sway the board, together with commitments to maintain the German company’s operational independence.

The greater mystery is how the transaction benefits Adnoc. The group wants to diversify and has a €150bn investment commitment burning a hole in its pocket. Chemicals, downstream from its traditional oil and gas business, is a comfortable sector. But acquiring unrelated businesses, with no cost savings or cross-selling potential, in challenging sectors is hardly a recipe for straightforward value creation.

For all that, Covestro is not a bad play, assuming the cycle eventually turns. It has plants across the globe and lower cost assets compared with local competitors. Adnoc plans to use it as a platform investment, through which it can bolster its position in chemicals further. Over a very long time horizon, it may even pay off.

Getting this deal across the line marks a success for Adnoc as it seeks to spread its wings beyond Gulf-based oil. German policymakers and unions appear to welcome it, at least based on the dignified silence with which they greeted this announcement. It may provide a test case for other Middle Eastern investors as they scour the world for opportunities.

Apollo plans to double assets by 2029 as it lays down challenge to banks

Chief Marc Rowan sets targets for private capital group to become one of world’s largest debt underwriters

Apollo Global Management is aiming to more than double in size over the next five years and become one of the largest debt underwriters in the world, under new targets unveiled by chief executive Marc Rowan.

Rowan on Tuesday laid out plans to increase Apollo’s assets under management from less than $700bn to $1.5tn by 2029, as companies increasingly turn to the private capital group for credit instead of the banks on which they have historically relied.

Rowan and his team at Apollo used Tuesday’s investor day presentation to triumphantly mark the beginning of a new era with asset managers at the forefront of high finance, explicitly declaring a 30-year reign of Wall Street banks now dead. Nonetheless, it also presented itself as an ally of large banks and said it would announce added partnerships after striking lending ventures with Citigroup and BNP Paribas in recent weeks.

The growth plans of Apollo, once just a small private partnership focused mostly on leveraged buyouts, underscores how the private equity industry has pushed far beyond its roots to play a role in how corporate America and millions of consumers finance themselves.

Apollo owns an insurer, Athene, which has provided it with a ready source of low-cost capital to fund deals and which is sitting on $33bn in capital reserves. Apollo said its funding costs were about half the industry average on Tuesday.

Large corporations such as Air France, Intel and AB InBev are increasingly willing to turn to Apollo for capital rather than to banks such as JPMorgan Chase and Goldman Sachs.

Fuelling Apollo’s ambitions are also what it sees as enormous opportunities to make loans to utilities, data centres and renewable infrastructure companies that will have trillions of dollars in capital needs but often require specially tailored financings.

“In every market, banks are being asked to do less and investors are being asked to do more,” Rowan said. “We are just at the beginning of this trend.”

He added: “At the end of the day private [markets] will win over public [markets]. That doesn’t mean replace public, it just grows faster. Private will win over banks. Again they won’t replace banks, just grow faster.”

If Apollo meets the new targets set by Rowan — including originating $275bn in debt annually within five years — it would make the group one of the biggest debt underwriters on Wall Street. Last year, JPMorgan was the lead underwriter on $268bn of corporate debt and securitisations, the largest player in the market, according to data provider LSEG.

Over the past 12 months, Apollo has originated $164bn in new loans, far surpassing its earlier targets.

Apollo’s reach into many of the largest corners of financial markets — including underwriting investment grade-rated debt and bundling securities of car loans and rooftop solar installations — is the result of its move into the insurance market through its life insurance arm Athene.

The unit, built by Rowan and other executives in the aftermath of the financial crisis, has given the group hundreds of billions of dollars of policyholder money to invest and has powered its expansion.

If Apollo is to meet the new targets, it will increasingly have to adopt features more closely associated with a large banking institution than its buyout roots. The group’s growth will also invite more scrutiny from financial regulators concerned about the growth of finance outside of the banking industry.

Rowan was questioned on Tuesday about how the firm would avoid underwriting mistakes — in effect loans that default or where a borrower falls into distress — as it increased its origination targets.

“When you consume the asset yourself, you are very concerned about what happens,” Rowan said, drawing a contrast with banks that largely underwrite loans with the goal to ultimately sell them on to other investors.

To invest the $150bn of investor money that Apollo predicts it will raise through insurance policies and private investment funds each year, it has bought or invested in more than a dozen specialised lenders and loan originators.

Last year, it acquired Credit Suisse’s securitised products unit, now called AtlasSP, which had for years been a vaunted Wall Street operation in asset-backed financing markets.

Rowan cautioned that the trends fuelling its business such as rock-bottom interest rates had shifted, requiring its dealmakers to adapt. “Change is coming. The tailwinds that got us here are not here any more,” he said.

However, Rowan ruled out large acquisitions as part of the group’s strategy despite a wave of consolidation in the asset management industry highlighted by BlackRock’s $12.5bn acquisition of Global Infrastructure Partners, which closed on Tuesday. “I don’t see significant M&A for us on the horizon,” said Rowan.

Shares of Apollo climbed 5 per cent on Tuesday, lifting its total return to the year to nearly 43 per cent.

Tech groups race to turn generative artificial intelligence into a staple of working life in bid to drive revenues

OpenAI is betting that artificial intelligence-powered assistants will “hit the mainstream” by next year as tech groups, including Google and Apple, race to bring so-called AI agents to consumers.

AI agents, which can reason and complete complex tasks for people, have become the newest front in the battle between tech companies as they look to drive revenues from the fast-developing technology.

“We want to make it possible to interact with AI in all of the ways that you interact with another human being,” said Kevin Weil, chief product officer at OpenAI.

“These more agentic systems are going to become possible, and it is why I think 2025 is gonna be the year that agentic systems finally hit the mainstream,” he added.

At its developer day in San Francisco on Tuesday, OpenAI revealed increased access to its new model series called o1, which has improved reasoning, as well as GPT-4o’s advanced voice capabilities. Developers will be able to access this technology in real time, where the AI can understand voice commands and converse in speech in a live scenario akin to a call.

The push to bring AI agents to the masses is one way OpenAI expects its technical advances will help drive future profits, as it moves ahead with plans to restructure as a for-profit company.

The fast-growing start up is aiming to complete a $6.5bn funding round this week at a $150bn valuation by persuading backers it has the capacity to beat its rivals to critical technological milestones and dominate the sector. Investors in talks with the company in recent weeks have included Microsoft, Nvidia, SoftBank and venture capital firms Thrive Capital and Tiger Global, according to people familiar with the discussions.

Microsoft, Salesforce and Workday last month put agents at the centre of their AI plans, while Google and Meta have also indicated this would be a focus for them when putting their AI models into their products.

While AI-powered assistants have been in train for nearly a decade, these latest advances allow for smoother and more natural voice interactions and superior levels of understanding thanks to the large language models (LLMs) that power new AI models.

Last year, OpenAI released “assistants application programming interface”, which was designed to enable developers to build agents using its technology. But the company said this was hampered due to limitations in the capabilities of earlier models.

Weil said OpenAI’s latest models’ improved ability to think and reason would manifest in its products, including ChatGPT, and for start-ups and developers who build products using its API. The company would not comment on whether it immediately plans to build its own AI agent.

One example shown in a bespoke demonstration of the tools was speaking to an AI system to help source products to buy locally, such as strawberries. The AI would then call the business to place an order of strawberries, taking on the user’s instructions for how many and the desired spend.

OpenAI said any uses of such a technology would not be allowed to conceal it was AI rather than a human and was only available to developers in six presets, rather than building new voices.

“If we do it right, it takes us to a world where we actually get to spend more time on the things that matter and a little less time staring at our phones,” said Weil.

Luxury giant invests in maker of upscale nonalcoholic sparkling wine amid tough market for Champagne

PARIS—Champagne’s biggest producer is giving alcohol-free bubbly a try.

Luxury giant LVMH MC -1.41%decrease; red down pointing triangle is buying a stake in a French maker of upscale nonalcoholic sparkling wine, betting that it can convince more consumers to pay upward of $100 a bottle minus the booze.

The deal for roughly 30% of French Bloom comes amid a surge in popularity for low- and no-alcohol drinks, and as LVMH’s Moët Hennessy division contends with sluggish demand for Champagne and spirits.

French Bloom, which launched in 2021, has sought to capitalize on a growing number of consumers moderating their alcohol intake in recent years and is now sold in 30 countries. The brand—led by a member of the Taittinger Champagne family—has roughly doubled its business each year and is on track to sell close to 500,000 bottles this year.

“There’s a huge demand for quality products without alcohol,” said David Serre, Moët Hennessy’s strategy chief. “It’s been clear to us for a few years, but we hadn’t found the right opportunity.”

LVMH and French Bloom declined to disclose a valuation for the deal.

Champagne is big business for LVMH, with Moët Hennessy holding a dominant position in the market. Its brands include Dom Pérignon, Krug and Veuve Clicquot. The company also owns prestigious wine labels such as Château d’Yquem and Château Cheval Blanc.

The investment in French Bloom marks LVMH’s first move into nonalcoholic drinks, joining some of the biggest names in the booze industry—from Guinness to Heineken—in moving into a fast-growing market.

Sales volumes of nonalcoholic still and sparkling wine increased by 7% last year, according to industry tracker IWSR. It forecasts volumes of nonalcoholic drinks to grow at a compound annual rate of 7% between 2023 and 2027, eventually capturing nearly 4% of the alcohol market.

By contrast, demand for wine and spirits remain sluggish this year after volumes dropped globally in 2023. In the first half of this year, Moët Hennessy was LVMH’s worst performing division, with sales dropping 12%.

The idea for French Bloom came after friends Maggie Frerejean-Taittinger, who was pregnant with twins, and Constance Jablonski, a model, noticed a lack of sophisticated nonalcoholic drink options at social gatherings.

A new brand of nonalcoholic sparkling wine could work, they figured, since a fine wine’s essence lies in its complexity and depth, with alcohol being secondary.

To make their idea a reality the two women tapped Frerejean-Taittinger’s husband, Rodolphe, for his winemaking experience. He comes from a long line of Champagne makers: His great-grandfather, the businessman Pierre Taittinger, acquired one of Champagne’s oldest houses in 1932 and gave it his name. Taittinger is now owned by Rodolphe’s cousin.

French Bloom invested heavily on research and development to create its nonalcoholic sparkling wine, said Maggie Frerejean-Taittinger, an American who moved from Chicago to France to study.

“When it comes to producing quality dealcoholized wine, starting with the best wine is not the way to go,” she said.

When a wine is dealcoholized, it loses about 60% of the aromas. “We have to start with something that has, we like to say, wider shoulders, versus if you dealcoholized a Chardonnay from Burgundy, you’re not left with a lot,” she said.

French Bloom sources its grapes from the Languedoc region of southern France, where the sunny climate results in grapes with naturally high alcohol content and sugar levels. They also harvest the grapes two to three weeks early, depending on the year, to have maximum acidity. They then age the wines in new oak barrels from Burgundy.

The wine is “undrinkable before the dealcoholization process,” said Maggie Frerejean-Taittinger. “It’s so overpowering.”

To remove alcohol, French Bloom uses a technique called cold-vacuum distillation where the wine is gently heated.

While some consumers might feel they should pay less for a booze-free drink, starting with an alcoholic wine and then removing the alcohol involves more work and higher costs, Maggie Frerejean-Taittinger said. The brand continues to refine its process, releasing the ninth version of its sparkling white earlier this year.

The brand sells bottles of sparkling white for $39 and sparkling rose for $44. Its latest nonalcoholic fizz, La Cuvée Vintage 2022, sets consumers back $109 a bottle. It is mostly sold in high-end bars and restaurants, or through luxury retailers.

While the brand initially expected customers would mostly be pregnant women and nondrinkers, it estimates that about 80% of its clients drink alcohol.

For Moët Hennessy, its investment is about giving consumers more appealing alternatives when they decide not to drink alcohol.

“There’s always been a nonalcoholic offering but it’s nothing really exciting, nothing sophisticated,” Serre said, adding that the company wanted to complement its Champagne houses, not replace them.

For some, though, booze-free bubbly can initially be a tough sell.

In the Taittinger family, it is tradition to baptize babies with Champagne.

The first time Maggie Frerejean-Taittinger put a bottle of French Bloom on the family dinner table, she recalls, her father-in-law “almost had a heart attack.”