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BASF and DEA agree multibillion oil and gas merger

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BASF, the German chemicals group, has agreed to merge its Wintershall energy unit with rival DEA in a multibillion-euro deal to create one of Europe’s largest independent oil and gas producers.

DEA, also based in Germany, is owned by LetterOne, the investment vehicle of Russian billionaire Mikhail Fridman, and chaired by Lord Browne, the former chief executive of BP.

The merged entity, to be called Wintershall DEA, will initially be two-thirds owned by BASF and one-third by L1 Energy, with a plan to list the company through an initial public offering “in the medium term”.

Lord Browne, who oversees LetterOne’s energy investments, said the deal would give the combined businesses “the scale needed to generate sustainable growth long into the future”.

BASF and LetterOne said they signed a letter of intent on Thursday and aimed to close the transaction in the second half of next year.

In 2016, DEA and Wintershall had combined revenues of about €4.5bn and earnings before interest, tax, amortisation and depreciation of €2.2bn, with production of about 600,000 barrels of oil and oil equivalent per day and reserves of 2bn barrels.

No valuation was given for the transaction but analysts have estimated it at about €12bn. Bankers said the enterprise value of the potential IPO could be as much as double that after synergies and growth opportunities were realised.

LetterOne will contribute all of DEA into the joint-venture and receive a third of the shares in the combined entity in return.

The split of shares was based on the valuation of the companies respective exploration and production businesses but did not account for Wintershall’s large gas transportation business. After the closing of the deal, Wintershall DEA will issue a convertible bond to BASF which must be converted into additional shares in the joint-venture within 36 months, increasing the chemical group’s stake.

Both companies are active in the North Sea and north Africa, while Wintershall has further assets in Russia, South America and the Middle East, and DEA in Mexico.

Mr Fridman, co-founder of the Alfa Group conglomerate and one of Russia’s richest men, bought DEA from German utility RWE for €5.1bn in 2015. BASF had also been in the running for the unit.

The deal adds to a recent rush of activity among European oil and gas companies as partial recovery in crude prices from their 2014 crash creates a more conducive environment for mergers and acquisitions.

Total of France acquired the oil and gas business of Danish conglomerate AP Moller-Maersk in August for $7.45bn.

A month earlier, Centrica of the UK and Norway-based Bayerngas Norge agreed to merge their North Sea assets.

While improving oil prices have given companies more confidence to do deals, bankers said consolidation was being driven by pressure on the industry to lower costs and increase efficiency after a brutal three-year downturn.

Lord Browne, who led BP for 12 years until 2007, led the push for the deal, according to people involved in the process.

Wintershall has been a useful hedge for BASF against volatility in its mainstay chemicals business since it acquired the oil and gas business in 1969.

But bankers said BASF had grown frustrated by the low valuation ascribed to the energy business by investors. Merging the unit with DEA would increase growth potential and deliver significant savings and synergies.

Wintershall DEA will be jointly headquartered in Kassel and Hamburg, the existing homes of the two businesses. The chief executive will be chosen by BASF and the deputy by LetterOne.

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