Bayer aims at $2.8B IPO for plastics unit Covestro

(Reuters) — Bayer‘s (ETR:BAYN) plastics maker Covestro aims to raise about €2.5 billion ($2.8 billion) with an initial public offering in the 4th quarter, sources said, leaving its parent to focus on drugs and pesticides.

Bayer unveiled plans last year to split off the business, formerly known as Bayer MaterialScience, in a move which has improved its share valuation by removing the discount typically applied to diversified companies. The company said earlier this week that the the groundwork for the planned IPO is complete.

In an “intention to float” notice today, Bayer said its Covestro offer would consist only of new shares and the proceeds would be used mainly to repay loans to Bayer.

Several people familiar with the plans said Bayer was telling investors to expect a share volume worth about €2.5 billion, or a quarter of Covestro’s targeted equity value of €10 billion or more.

A spokesman for Bayer, whose stock was down 2.4%, declined to comment on the volume.

The sources said the exact figures for the flotation of Europe’s 4th-largest chemicals maker would depend on future market conditions.

If confirmed, it would be the biggest listing in Germany since Deutsche Post went public in a €6.25 billion transaction in November 2000. A more recent flotation of comparable size was Tognum in 2007, worth €2 billion.

Selling new Covestro shares to redeem loans from Bayer, instead of having the parent company sell Covestro shares directly to the market, gives Bayer more flexibility to adjust how many shares it sells, depending on stock market conditions closer to the flotation, finance chief Johannes Dietsch said.

The parent company will commit to holding onto its Covestro shares for 180 days after the listing, he said.

More firepower

Bayer said the aim of the deal was to lower Covestro’s overall net debt, including pension liabilities, to 2.5-3.0 times adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for 2015.

Lowering its own debt would give Bayer more firepower to expand in healthcare, veterinary medicine and farming pesticides, so-called life sciences. It is anticipating consolidation in the crop chemicals and seeds industry and also has costly drug development and marketing campaigns to fund.

Plastics specialist Covestro is seeking an investment-grade credit rating, according to the Bayer statement.

The 1st day of trading typically comes about 4 weeks after a company’s intention to float notification.

Covestro is the world’s largest maker of chemicals for the soft foams used in mattresses, car seats and running shoe soles and for rigid foams used to insulate buildings and fridges, where it competes with BASF and Huntsman.

It also makes transparent plastics for panoramic roofs, roadside noise barriers and blu-ray disks, competing with Sabic , a sector that has suffered from overcapacity.

Deutsche Bank and Morgan Stanley have been hired as joint global coordinators, Bayer said. They will act as joint bookrunners with Bank of America Merrill Lynch, Citi, Credit Suisse, JP Morgan and UBS. BNP Paribas, Unicredit and Kepler Cheuvreux have been mandated as co-lead managers.

($1 =€0.8976)

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