Adnoc’s long Covestro chase set to achieve Europe’s largest takeover of year
UAE oil company’s lengthy courtship and sweetened €14.4bn bid key to overcoming German chemical group’s reluctance
Sheikh Mohammed bin Zayed al-Nahyan, president of the United Arab Emirates, returned from last week’s Eid al-Adha holiday to find a request in his in-tray.
Could Abu Dhabi’s national oil company Adnoc bump up its offer for Covestro, one of Germany’s largest companies, by just €2 per share or 3 per cent?
Sheikh Mohammed obliged, closing in on a potential €14.4bn deal including debt after more than 12 months of on-off negotiations that would make it Europe’s biggest takeover this year, the largest cash-deal in the chemical industry and the first big takeover of a Dax 40 company by a Gulf state.
For Adnoc, the €62-a-share deal — a premium of nearly 60 per cent on the German group’s share price last June before news of the initial talks — is part of a five-year, $150bn plan to transform itself from a traditional state-owned oil company into an international energy giant.
After doing a string of smaller deals, in particular for gas assets, Covestro is a tent-pole acquisition that the oil company can proudly present to Sheikh Mohammed at its November strategy day.
One person with knowledge of the negotiations said the lengthy courtship had been essential to overcoming the nervousness of the German company.
“Sometimes these things just have to be digested by both sides. You need to reach the right trust level and if you rush it, then you might never get there,” they said. “Especially the German side needed to understand what Adnoc’s objectives are, because it is not like a private equity firm or a strategic buyer who slashes costs.”
The final negotiations could be wrapped up soon, as many of Adnoc’s questions have already been answered by Covestro ahead of formal due diligence, one person said.
Covestro, spun out of pharma company Bayer in 2015, is a market leader in producing the chemicals used to make foam insulation and speciality plastics. The footballs in this year’s Euro 2024 championships are printed with Covestro’s coatings.
“It is smack in the middle of some [climate] transition megatrends,” said the person with knowledge of the negotiations. “They are leading in forms of foam insulation — and insulating buildings is growing above GDP growth. Polycarbonates are lightweight speciality engineering plastics, which are used to replace metals with lighter weights, for example in battery casings for the electric vehicle industry.”
A large part of its business was in Asia and in the US, they added. “They are not just tied to the German automotive industry and the construction industry. They are much more diversified.”
But Covestro’s share price peaked in 2018 at €95 and had fallen to under €40 before Adnoc started its pursuit. Since then it has risen to €53.86, its Monday close.
More recently the German company has suffered from higher energy prices and their impact on its European industrial customers, as well as from competition from China. At its last results presentation, Covestro said that while its sales volumes had increased, its prices had dropped.
Analysts at TD Cowen said in a note that fair value for Covestro’s shares was €41.20 and added that “considering the stagnant earnings at Covestro in the last year” and the slim prospect of recovery, it was unclear what strategy the management would have presented at its capital markets day on Thursday this week, which was cancelled after the deal announcement.
But analysts at Barclays and Citi both have price targets of €61 a share on the stock, and Kepler has €65. At its first-quarter results in April, Covestro said it had turned a corner and was forecasting earnings before interest, tax, depreciation and amortisation (Ebitda) for this year of between €1bn and €1.6bn.
Sebastian Bray, head of chemicals research at Berenberg, said the deal was a way for Adnoc to expand “by targeting a good-quality asset that has not done that well operationally in the last two years due to weak demand and [high] European energy prices”.
Covestro’s 20 per cent fall in sales in 2023 to €14.4bn and negative net income left expansion out of the question. Under the cash-rich ownership of Adnoc, the company is likely to have more access to capital for growth.
“A $10bn market cap is not very large for a global company,” said the person close to the deal. “You have to make sure you are always pre-empting the next cycle and not overextending yourself with the next €2bn project.”
People close to Adnoc stressed that if a deal goes through, Covestro will be managed independently and allowed to pursue its growth strategy, as well as its focus on sustainability. “There is obviously a firm belief in both the management team, their credentials, experience and the growth trajectory of this company,” they said.
Covestro is trying to transition away from its heavy dependence on feedstocks derived from oil, and is experimenting with ways of recycling and breaking down plastics back into raw materials so that it can reuse them.
Asked how ownership by a huge oil company fitted with Covestro’s sustainability efforts, the company’s chief financial officer Christian Baier told the German business magazine Wirtschaftswoche in May: “One thing is clear: sustainability is the core of our strategy.”
The people close to Adnoc pointed to synergies with the company’s other petrochemical company Borouge, which is also experimenting with recycling plastics.
Other points for negotiation will include commitments to Covestro’s unions over its 17,500-strong workforce, which was trimmed by 500 people last year, and on whether jobs are preserved in Germany as the company grows further in the US and Asia.
The UK high street will fall into ever fewer hands
Consolidators such as Frasers and Next have significantly outperformed the wider market over the past year
Luxury goods groups such as LVMH have long built empires by collecting high-end brands. On UK high streets and online, a small group of mid-market houses are gaining ever more dominance by different means.
Sports Direct-owner Frasers and Next have been scooping up mid-market brands such as Joules and Jack Wills in recent years. Brands that struggled as independent businesses as costs soared can survive as part of a wider group with extensive warehousing, distribution and ecommerce capabilities. Both Frasers and Next have also taken equity stakes in retailers such as Currys and Reiss with which they see tie-up opportunities. Even Marks and Spencer now has a third-party retail strategy.
Frasers on Monday added to its brand empire by acquiring ecommerce group THG’s higher-end goods websites, including Coggles. The deal is part of a wider partnership that will allow Frasers to offer its “buy now, pay later” and loyalty platform — Frasers Plus — to THG’s customers.
This makes sense on several levels. Financial services only make up a fraction of Frasers’ revenues but it hopes other retailers will follow THG in adopting Frasers Plus. Finance accounted for 18 per cent of rival Next’s trading profits after funding costs in its last financial year, highlighting the potential that BNPL could have for Frasers even if it is a crowded market. Frasers will also benefit from THG’s logistics and distribution capabilities in markets such as Australia.
Frasers’ founder and majority shareholder Mike Ashley was well known for buying up slightly outmoded sports brands such as Everlast and Karrimor. His son-in-law Michael Murray, who took over as chief executive in 2022, has continued that tradition but enhanced the company’s management of brands, says Liberum’s Wayne Brown, citing its stewardship of the upmarket retailer Flannels in particular.
There have been some misses: Frasers put the online luxury retailer Matchesfashion into administration earlier this year barely three months after acquiring it. Its sometimes sporadic stakebuilding has also confused investors, particularly when it comes to challenged fast-fashion retailers such as Boohoo.
That is partly why Frasers, which trades on a forward price earnings multiple of 9 times, looks cheap compared with its peers. Next, the sector darling, trades on almost 15 times. Frasers has also been trying to address legacy governance concerns.
Other Frasers investments have done rather better: shares in electrical retailer Currys have gained more than 40 per cent since Frasers revealed its holding in June last year.
High-street consolidators have significantly outperformed the wider market in the past year. Expect their shopping to continue.
Apple Sets Bold New Goals for Automating iPhone Factories
The iPhone maker has told managers to reduce by as much as half the number of workers on iPhone final assembly lines using automation. If those efforts continue, they could have far-reaching implications for where Apple makes products and China’s labor market.
It was the kind of incident Apple executives never want to repeat. In November 2022, at a factory in Zhengzhou, China—the largest plant in the world for making iPhones—police officers in white hazmat suits beat factory workers, who had begun protesting over strict Covid-19 lockdowns and disputes over pay.
Video of the episode, which took place at a factory operated by Foxconn, Apple’s largest manufacturing partner, circulated on social media, while the disruptions caused iPhone shortages, leading to a sales decline for the smartphone that holiday season. Soon after, Apple’s senior vice president of operations, Sabih Khan, issued an edict to his organization, instructing managers to reduce the number of workers on iPhone final assembly lines by as much as 50% over the next few years, said two former Apple employees.
The Takeaway
• Apple aims to reduce workers on iPhone final assembly lines by up to half over the next few years
• Production of the iPhone 15 had a significant amount of automation
• Pandemic disruptions to iPhone supplies prompted Apple to revisit automation projects
To accomplish that, Apple began greenlighting automation projects for its assembly lines that it had previously mothballed due to high up-front costs, they said. The efforts resulted in a significant amount of automation handling the final assembly for last year’s iPhone 15, according to three people involved in its manufacturing.
Apple’s push for automation could be transformative for the global consumer electronics industry. If Apple can one day more fully automate iPhone production, it would be able to move more of its manufacturing operations from China to countries like Vietnam and India, where experienced manufacturing engineers are harder to come by, according to former Apple manufacturing managers.
Reducing its reliance on China has become more important for Apple due to labor disruptions such as those in Zhengzhou, along with growing tensions between the U.S. and China over trade and Taiwan. Automating more of the production of its devices could even eventually help Apple bring more manufacturing back to the U.S., the former Apple managers say—though that likely wouldn’t mean large quantities of factory jobs.
Over time, increasing automation could also have far-reaching consequences for China’s manufacturing industry, which contributes millions of workers to Apple’s supply chain each year. No other consumer electronics brand operating in the country has the scale to absorb these workers if they become unemployed.
In some cases, some big factories that once made Apple devices have appeared to go dark after the company shifted parts of its manufacturing out of China. Recently, drone footage of a Foxconn factory in Nanning, China, that once produced iPads and MacBooks showed a nearly deserted campus after Foxconn moved the manufacturing of those devices to Vietnam.
An Apple spokesperson declined to comment
Already Apple appears to have reduced the number of people who work on manufacturing its products in China. Earlier this year, Apple disclosed in an annual report on its supply chain that the total number of employees it monitors at its manufacturing partners for work-hour compliance shrank to more than 1.4 million in 2023 from a peak of more than 1.6 million in 2022.
It was the first time that figure shrank year to year in over a decade of Apple publishing the reports. The number of workers fell even as the number of factories Apple monitors in the report increased to over 380 from more than 300 a year earlier.
Apple ships roughly 200 million iPhones a year, accounting for more than half its sales. As a result, the majority of the workers in its supply chain are involved in assembling the iPhone and its related components, according to multiple former Apple employees. In the past, Foxconn’s Zhengzhou factory has employed as many as 300,000 people, who work 12-hour shifts, six days a week, earning at least $800 a month.
To carry out its automation plans, Apple has begun acquiring machine-learning startups to help it replace people who inspect products on its assembly lines. Earlier this year, it bought Canadian startup DarwinAI, which uses computer vision to inspect components like printed circuit boards for defects.
The startup also made small machine learning models that can run on iPhones. If iPhones could test themselves, Apple wouldn’t need to purchase testing equipment at a massive scale. That could make it faster and cheaper to test and calibrate the devices coming off the assembly line in factories, according to a person with direct knowledge of the matter.
And last year, Apple acquired another startup, Palo Alto, Calif.–based Drishti, that helps it analyze video footage of its assembly lines to identify bottlenecks and production problems in real time, the person said. Bloomberg earlier reported on the DarwinAI deal; Apple’s acquisition of Drishti hasn’t been previously reported.
Rising Labor Costs
For a device as high tech as the iPhone, putting each one together has long been an intensely manual process.
In Zhengzhou, for example, workers sit shoulder to shoulder, welding, soldering, screwing and snapping iPhone components into place across more than 100 assembly lines. The lines can each be up to five football fields long from one end to the other, according to multiple people who work in iPhone assembly. Each line can have more than 1,000 workers and produce between 300 and 600 iPhones an hour.
Within the facility, there are separate areas known as subassembly lines where workers prep individual modules such as the main logic board, speakers, receivers, buttons, cameras, wireless charging coils, microphones and chassis for assembly into completed products, the people said. That often involves attaching metal brackets and routing flexible printed circuit boards around the components before they can be plugged into the main logic board.
For years, Apple has dabbled in automation projects for making the iPhone—with mixed results, as The Information reported in 2020.
Employees during lunch hour at a Foxconn factory in Zhengzhou. Photo by Getty
Originally, rising labor costs in China, a desire to increase the consistency of its products and the growing difficulty of recruiting workers to monotonous factory jobs prompted those efforts, said multiple former Apple employees who worked in operations.
But other forces were at play too. Each year, iPhones become more and more difficult to assemble as they become more sophisticated. High turnover at the factories that assemble iPhones in China meant Apple and its manufacturing partners had to break down the assembly of the iPhone into simpler tasks to make it easier for inexperienced workers to complete them.
But that meant total headcount at iPhone factories continued to rise as Apple added more stations on assembly lines to accomplish those simpler tasks, former Apple employees said.
In 2016, Apple conducted a study of the time it took to assemble iPhones and discovered that manual labor comprised just a quarter of the process, said a person with direct knowledge of the matter. The remaining time consisted of transporting components and materials within the factory or simply waiting for other stations to become ready.
Apple executives realized that there was lots of room to automate more of the iPhone’s assembly and reduce bottlenecks on the line, which could increase the line’s productivity while also reducing headcount.
Apple’s early efforts to automate parts of its manufacturing process began with products that had lower sales volumes than the iPhone, such as MacBooks, iPads and Apple Watches. The company deemed automating some of the production of those devices less risky and capital intensive than it would be for the iPhone, according to former Apple employees who worked in its operations group.
In contrast, senior Apple executives were far more cautious about automating iPhone production, concerned that the risks of failure were too high, those former employees said.
In internal meetings at Apple, managers often discussed a cautionary tale: Tesla’s efforts to heavily automate the production of its Model 3 sedan at a factory in Fremont, Calif., which turned out to be a disastrous move. The electric automaker eventually made more of the process manual to speed up production.
Another topic in those discussions was the aversion Apple CEO Tim Cook and Chief Operating Officer Jeff Williams have for fully automated assembly lines, born out of their experience at IBM in the 1990s, where the duo worked previously.
Apple also found it difficult to justify the cost of machinery that might only be used for a single year before the iPhone goes through a design refresh, which would render that equipment obsolete. Other industries, such as automobile manufacturing, can spread the cost of automated equipment over a decade or more as they tend to make the same parts for longer periods of time.
Apple’s mindset on the costs of automation began to change during the pandemic, though. The supply disruptions, prompted partly by China’s brutal Covid-19 lockdowns, convinced executives that automating more of Apple’s production was worth the cost, multiple former employees said.
Stubborn Screws
The leader of Apple’s iPhone automation efforts is Peter Thompson, an Apple vice president and 16-year veteran of the company, who first cut his teeth as a vehicle engineer at Ford, according to five former Apple employees who have worked with him. Thompson is known for his ability to execute and drill deep into the details.
His recent projects for the company include developing a semi-automated factory in the U.S., which performs personalized engravings on Apple products. Thompson took on the project, which included a $100 million investment by Apple, after he bought Apple products for his family one Christmas, only to discover with embarrassment that the engravings had been done incorrectly, said a person who spoke to him.
Over the past year, Thompson’s team has successfully automated parts of the iPhone’s assembly, working closely with manufacturing partners such as Foxconn, Luxshare Precision and Pegatron. Those successes include machines that install metal brackets and flexible printed circuit boards onto components without human aid, said multiple people with direct knowledge of the effort.
These and similar efforts have allowed Apple and its partners to eliminate positions for thousands of workers in China, according to people who work in Apple’s supply chain. For some processes, they have reduced headcount by as much as 30%, according to one employee at an iPhone manufacturing partner.
Still, Apple has run into some hitches. In some cases, it has pressured its manufacturing partners to pay for automation equipment so it can avoid the expense itself, said multiple people familiar with its supplier relationships. The machines can add up to hundreds of millions of dollars in capital expenditures each year given their complexity.
Some of those manufacturers don’t want to buy the equipment because of how specialized it is for iPhone production, which limits their ability to use it to make devices for other clients. They also worry they won’t see a return on their investment in the equipment if Apple changes the design of the iPhone too much in its next models. Apple typically wins in those discussions because of its ability to play one supplier off another.
And some steps in the production process have proved stubbornly resistant to automation.
This year, Apple sought to build on some of its automation successes by using machines to install the iPhone’s buttons, receiver, speaker and main logic board into its chassis, according to three people who worked in Apple’s supply chain. But the machines stumbled in properly fastening those components, which have to be carefully screwed into position at odd angles, the people said.
Late in the development of the iPhone 16—the latest model of the device, due out in the fall—Apple canceled plans to automate these processes because of the high rate of defects, two of the people said. The decision meant Apple and its partners will have to delay their headcount reduction targets for at least another year, they said.