3 – Acquisitions and divestitures

Acquisitions

In August 2018, BASF acquired a range of businesses for seeds, non-selective herbicides, seed treatments and the global vegetable seed business from Bayer. The adjustment of the preliminary purchase price allocation for this acquisition gave rise to the effects presented in the table.

In accordance with IFRS 3, additional adjustments will be made to the purchase price allocation if further relevant facts and circumstances become known within the 12-month measurement period ending in August 2019.

Divestitures

On January 31, 2019, following the approval of all relevant authorities, BASF and Solenis concluded the transfer of BASF’s paper and water chemicals business to Solenis. Since February 1, 2019, the combined company has operated under the name Solenis UK International Ltd., London, England, and offers bundled sales, service and production capabilities across the globe. BASF holds a 49% share in the combined entity; 51% of the shares are held by funds managed by Clayton, Dubilier & Rice, and by Solenis management. The transaction included production sites and plants of BASF’s paper and water chemicals business in Bradford and Grimsby, England; Suffolk, Virginia; Altamira, Mexico; Ankleshwar, India; and Kwinana, Australia. BASF reports its share of Solenis’ income after taxes using the equity method in income from operations before special items and in income from operations of the BASF Group.

BASF and LetterOne completed the merger of Wintershall and DEA on April 30, 2019. On September 27, 2018, BASF and LetterOne had signed a transaction agreement to merge their respective oil and gas businesses in a joint venture, creating a leading independent European exploration and production company with international operations in core regions. LetterOne contributed all shares in DEA Deutsche Erdoel AG to Wintershall Holding GmbH and received new shares in the latter. The company was renamed Wintershall Dea GmbH. Including preference shares, BASF has a total shareholding of 72.7% in Wintershall Dea GmbH. No later than 36 months after closing but in all cases before an IPO, these preference shares will be converted into ordinary shares in Wintershall Dea GmbH. From the signing of the agreement in September 2018 until the closing of the merger, BASF’s oil and gas business was reported as a discontinued operation. Since the merger, BASF’s interest in Wintershall Dea GmbH has been accounted for using the equity method. The gain from the transition from full consolidation to the equity method is shown in income after taxes from discontinued operations as of April 30, 2019. Since May 1, 2019, BASF has reported its share of Wintershall Dea GmbH’s net income in income from operations before special items and in income from operations of Other.

Agreed transactions

On September 18, 2017, BASF signed an agreement with the Solvay group on the acquisition of Solvay’s global polyamide business, subject to the approval of the relevant antitrust authorities. The E.U. Commission approved the acquisition of the polyamide business, subject to certain conditions, on January 18, 2019. These conditions require the sale of parts of the original transaction volume to a third party. Specifically, this refers to Solvay’s production plants and innovation competencies in the engineering plastics field in Europe. The sale process has already begun. The approval process is pending in China. The transaction is expected to close in the second half of 2019, as soon as all remaining conditions are met, including the divestiture of businesses and assets to a third party. BASF plans to integrate the polyamide business into the Performance Materials and Monomers divisions. Before being adjusted to reflect the antitrust-related changes to the scope of the transaction, the purchase price on a cash and debt-free basis and excluding other adjustments would have been €1.6 billion.

Discontinued operations

The oil and gas business was presented as a discontinued operation following the signing of the binding agreement between BASF and LetterOne to merge their respective activities on September 27, 2018. The disposal group was derecognized on closing of the transaction on April 30, 2019.

Earnings from discontinued operations until April 30, 2019, were as follows:

The gain on the disposal of the discontinued oil and gas business is reported under other operating income and expenses.

The effects of the disposal of the discontinued operation are presented in the following table:

Discontinued operations accounted for the following amounts in BASF’s statement of cash flows:

The shares held in Wintershall Dea GmbH were initially measured at fair value as of the date of deconsolidation on April 30, 2019, using the discounted cash flow method on the basis of the income approach according to IFRS 13.62. Fair value is calculated as the present value of future cash inflows and outflows on the basis of unobservable inputs (Level 3). Significant inputs are assumptions on the long-term development of oil and gas prices, which were based, among other things, on market values and expert assessments. The valuation of Wintershall Dea GmbH assumes an oil price of $66 per bbl (Brent) and a gas price of approximately €16 per MWh (roughly $6 per mmBtu) for 2020.

The estimation of cash flows and the assumptions used consider all information on the future development of the operating business available on the measurement date.

A model based on a field-related valuation approach was used for the exploration and production business. This took into account the expected cash flows as well as the tax payments in the individual countries. The period under consideration includes the planned license terms and the production profiles of the included oil and gas fields. A significant factor here is the cost of capital rate, which takes into consideration the country risk for the country concerned and the applicable tax rate. Other components are a risk-free interest rate, a market risk premium and a spread for credit risk based on the respective industry-specific peer group. Taking into account these parameters, a cost of capital rate after tax of between 6.17% and 11.49% was used.

Where relevant, regulated gas transportation rates and specific average cost of capital rates were used for the transportation business. The cost of capital rate after tax was between 5.52% and 5.91%.

The valuation also took into account expected synergy effects from the merger due to lower ongoing operating costs or investment measures.

Initial recognition at fair value (€14.4 billion) uncovered hidden reserves and liabilities. In line with the purchase price allocation, the hidden reserves and liabilities were mainly attributable to exploration and production assets.

Groups of assets and liabilities held for sale (disposal groups)

On January 31, 2019, following the approval of all relevant authorities, BASF and Solenis concluded the transfer of BASF’s paper and water chemicals business to Solenis. The disposal group was derecognized on divestiture of the paper and water chemicals business.

The calculation of the disposal gain is presented in the following table: