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Wintershall-DEA: The anatomy of a merger

The Wintershall-DEA deal brings together businesses that in 2017 had combined sales of €4.7bn

At the end of September, almost a year on from the announcement that Wintershall and DEA had agreed in principle to merge, their respective owners—Germany chemicals company BASF and LetterOne, the Luxembourg-based investment fund co-founded by the Russian oligarch Mikhail Fridman in 2013—signed a "definitive transaction agreement".

Assuming the merger is approved by the relevant authorities, the transaction is expected to close in the first half of 2019. It will bring together businesses that in 2017 had combined sales of €4.7bn, and oil and gas production of 575,000 boe/d.

The merger is expected to generate synergies of at least €200m a year and create a regionally more balanced footprint. More than anything, though, it is about scale and clout, and the opportunities this will present to grow the business. The expectation is that combined production will grow to 800,000 boe/d over the next three to five years.

"Wintershall DEA is the largest E&P merger in Europe for over a decade, and will have a diverse portfolio of outstanding growth prospects, with the scale needed to access important new opportunities," says former BP chief executive John Browne, who now heads LetterOne's energy investment arm, L1 Energy.

Browne believes that the merged entity will be capable of playing alongside Shell, Total and his former company, BP. "We expect the company to evolve rapidly into a world-class and globally competitive organisation with an international portfolio."

It's not, however, a merger of equals. Wintershall already sees itself as a world-class and globally competitive organisation and is substantially larger than DEA.

Wintershall's 2017 oil and gas production, at 164m boe, was almost four times that of DEA, at 45m boe. Its sales were more than double those of DEA.

Nevertheless, Mario Mehren, the CEO of Wintershall who has already been chosen to lead the new venture, sees value in the transaction. "Wintershall DEA will become the leading independent European exploration and production company with strong international operations," he says.

"By combining Wintershall and DEA we create the basis for further profitable growth. We will strengthen the portfolio footprint of the combined business and realise synergies, thus creating significant additional value."

The disparity in the size of the two companies is reflected in the merger agreement. Initially LetterOne will own a third of the combined company, while BASF will own the remaining two-thirds, "reflecting the value of the respective exploration and production businesses".

Wintershall also owns a sizeable gas transportation business—so BASF will receive additional preference shares. In due course these will be converted into ordinary shares of Wintershall DEA, giving BASF a total shareholding of 72.7%.

The medium-term strategy is to list Wintershall DEA through an initial public offering (IPO) and the preference shares will be converted before this takes place-and "no later than 36 months after closing".

What happens to Wintershall DEA after that will be interesting to see. It's been a while since there was a Europe-based independent world-scale upstream company with international operations and a strong weighting towards natural gas. Remind you of anyone?

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