BASF, LetterOne Sign LOI to Merge Upstream

German chemicals giant BASF and Russian-owned LetterOne announced December 8 they have signed a letter of intent to merge their oil and gas subsidiaries Wintershall and DEA, advancing on their announcement of two weeks ago.

BASF said it would create one of the largest independent European exploration and production companies, dubbed Wintershall DEA, which would initially be 67%-owned by BASF and 33% by LetterOne. A listing on a stock exchange is envisaged in the medium term, but BASF did not say when or of how much.

As of closing, BASF said Wintershall DEA shall issue a mandatory convertible bond to BASF reflecting the value of Wintershall’s gas transportation business. No later than 36 months after closing, this bond shall be converted into new shares in Wintershall DEA, resulting in a higher shareholding ratio for BASF.

In 2016, the combined business had pro-forma sales of €4.3bn, and net income of €326 million. Overall, production volumes of Wintershall and DEA amounted to 590,000 barrels of oil equivalent per day. Based on proven reserves (1P) of 2.1 billion BOE at the end of 2016, the reserve to production ratio of the combined business would be around 10 years.

BASF would determine the chief executive officer and LetterOne the deputy chief executive officer of Wintershall DEA. The company would be headquartered in Kassel and Hamburg, Germany. Following the closing of the transaction, BASF expects to account for its stake in the joint venture under the equity method in BASF’s consolidated financial statements.

In the coming months, BASF and LetterOne will prepare and conduct a confirmatory due diligence and negotiate definitive transaction agreements. Closing could be expected in the second half of 2018, subject to customary regulatory approvals. Until the closing, Wintershall and DEA will continue to operate as independent companies. There is no assurance that BASF and LetterOne will enter into definitive transaction agreements or that the intended transaction will be consummated.

German newspaper Handelsblatt quoted analysts saying that the new Wintershall DEA would have a market value of about 14bn euros ($16.5bn).