Shares of Braskem (NYSE:BAK) rose 22% today after Brazil's largest chemical manufacturer confirmed what investors had long suspected: Talks are under way for Dutch chemicals leader LyondellBasell Industries NV (NYSE:LYB) to acquire majority control of Braskem and gain a manufacturing footprint in South America. Rumors of such talks were first reported in October 2017, but both companies denied them.
Any deal hinges on agreements with Braskem's largest shareholders -- Brazilian construction company Odebrecht and/or Brazilian state-owned petroleum company Petrobras, which combine to own approximately 74% of the chemical manufacturer. Recent economic turmoil in its home country -- and a furious race at each parent company to deleverage their balance sheets -- plays into the hands of LyondellBasell.
As of 1:47 p.m. EDT Friday, the stock had settled to a 19.6% gain.
As reported by Reuters, LyondellBasell is currently in talks to acquire Odebrecht's 38.3% stake in Braskem in a combined cash and stock transaction. That alone would give the Dutch group majority control of Braskem, although it expects to approach Petrobras next to discuss acquiring the oil major's 36.1% stake in the Brazilian chemical producer. The second deal is expected to be all cash.
Both Odebrecht and Petrobras could use a healthy dose of financial aid right now, as they're both actively attempting to pay down enormous debt balances. It's pretty bad at the moment. The construction conglomerate actually pledged its stake in Braskem to secure a line of credit, so creditors might have to approve any acquisition. Meanwhile, Petrobras has also been unloading non-core assets in the last two years to reduce its debt balance by tens of billions of dollars. Selling its stake in Braskem might represent the last piece of low-hanging fruit at this stage.
As for Braskem, linking up with LyondellBasell could be a phenomenal development. A combination would create the world's largest producer of polypropylene and polyethylene with operations in North America, South America, and Europe. Leaving the Brazilian chemical powerhouse as a stand-alone company would significantly de-risk its growth potential, as it would be better to have one financially secure Dutch majority shareholder than two cash-strapped Brazilian majority shareholders.
The talks are still preliminary and no deal is guaranteed to happen, although LyondellBasell and Odebrecht are reported to be looking to reach a potential deal within two months. Braskem shareholders should be rooting for the chemical manufacturer to trade in its financially struggling parents for the Dutch leader, as financial stability would remove a lot of pressure over its growth strategy, or even efforts to deleverage its own balance sheet. Until a deal is finalized, however, all investors can do is wait.