German investment bank Berenberg has reiterated its 'hold' rating on chemicals giant BASF, while slightly raising its price target to €51.50. However, the bank's analysts are far from enthusiastic about the prospect of BASF pursuing a takeover of rival Evonik Industries, a move that has been the subject of market speculation.
Berenberg's caution stems from a belief that a deal with Evonik would clash with BASF's own stated strategy of simplifying its portfolio. The bank also questions the logic of such an acquisition amid growing calls for European protectionism, which Berenberg views with skepticism. Additionally, Evonik appears reluctant to engage, and Berenberg expects headwinds in methionine—a key animal-feed ingredient that Evonik produces—to weigh on its 2027 profits.
Why a potential deal raises eyebrows
BASF, the world's largest chemical company by revenue, has been undergoing a strategic overhaul in recent years, aiming to streamline its operations and focus on higher-margin businesses. The company has already announced plans to divest or restructure several divisions, including its agricultural chemicals and battery materials businesses. A large acquisition like Evonik would seem to contradict that narrative, as it would add significant new assets and complexity.
Evonik, a specialty chemicals company, has its own challenges. Its methionine business, which supplies an essential amino acid used in animal feed, is facing pricing pressure and oversupply in the market. Berenberg expects these headwinds to persist into 2027, potentially dragging on Evonik's earnings. For BASF, acquiring a company with such near-term profit pressures could dilute its own earnings growth, especially if the deal is financed with debt.
The timing also appears problematic. Berenberg sees 2027 as a tougher year for both companies, with higher energy costs and softer demand expected to weigh on the entire chemicals sector. European chemical producers have been grappling with elevated natural gas prices since the energy crisis, and a potential economic slowdown could further dampen demand for industrial chemicals.
What it means for investors
For everyday investors, the key takeaway is that Berenberg is not convinced that a BASF-Evonik combination would create value. The bank's 'hold' rating suggests it sees limited upside in BASF shares at current levels, despite the modest price target increase. The new target of €51.50 implies only a slight gain from recent trading levels, indicating that the stock is fairly valued in the bank's view.
Investors should also note that the speculation around a potential deal is just that—speculation. Neither BASF nor Evonik has confirmed any talks, and Evonik's apparent lack of interest could scupper any approach. In the meantime, BASF's own fundamentals remain the primary driver of its share price. The company recently lifted its 2026 profit outlook, but a looming cash target for the fourth quarter remains a focus for investors.
Berenberg's concerns about 2027 echo broader worries across the European chemicals industry. As the European earnings season puts 2026 targets under the microscope, investors are increasingly looking ahead to the following year, where energy costs and demand weakness could bite harder. The bank's view suggests that even if BASF avoids a costly acquisition, it may still face a challenging operating environment.
Broader market context
The chemicals sector is often seen as a bellwether for the broader economy, given its exposure to manufacturing, construction, and agriculture. A weak outlook for chemicals can signal slower industrial activity, which has implications for other sectors and the overall stock market. Berenberg's cautious stance on BASF and Evonik is therefore a data point for investors monitoring the health of European industry.
Meanwhile, the debate over European protectionism is gaining traction, with some policymakers calling for tariffs or other measures to shield domestic industries from foreign competition. Berenberg's skepticism about such calls suggests that the bank does not see protectionism as a reliable driver of growth for chemical companies. Instead, it points to structural challenges like energy costs and global oversupply as more significant factors.
For investors, the practical takeaway is to keep an eye on BASF's strategic moves and its ability to navigate a tougher 2027. The company's focus on simplification could still pay off, but the path is not without risks. As always, diversification and a long-term perspective remain prudent approaches when investing in cyclical sectors like chemicals.
