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* CEO dangles buybacks and special dividends
* Has benefited from rivals' outages, higher prices
* Targets 5 bln eur in total free cash flow over 5 yrs
* Eyes bolt-on deals to strengthen specialty businesses (Adds CEO quotes, industry background)
By Ludwig Burger
FRANKFURT, June 29 (Reuters) - German plastics and chemicals group Covestro pledged it would return cash to shareholders if it cannot find a suitable major takeover target within two years as it eyes 5 billion euros ($5.7 billion) in total operating cash flow after investments over the next five years.
"We have no reason to hoard liquidity if no significant external investment opportunity arises. We intend to return excess cash to our shareholders after 24 months without significant M&A activity," Chief Executive Patrick Thomas said in a statement on Thursday, citing share buybacks or special dividends as options.
The maker of chemicals for blu-ray discs and insulation foams is banking on better usage rates at its large chemical sites, which parent Bayer has kept in shape over recent years and which do not require considerable upgrades.
Rivals in the market for chemicals used in insulation and upholstery foams have suffered a number of technical setbacks, leading to muted supply growth and a surge in prices over previous quarters.
The company's cash flow after expenditures on plants and equipment, or free cash flow, tripled to close to a billion euros last year and Covestro on Thursday raised the prospect of sustaining that rate over the next five years, even though it will invest to overcome some production bottlenecks.
Market leading positions in its established businesses -- transparent polycarbonate plastics used for headlights and sunroofs in cars as well as polyurethane foams for vehicle seats and insulation -- keep Covestro from large acquisition in those markets due to antitrust concerns.
But it would seek to bolster its smaller but high-margin coating ingredients business.
"We look at bolt-on acquisitions to boost our specialty businesses," said Thomas, who temporarily took on the role of finance chief after the departure of CFO Frank Lutz, who lost out to a fellow board member in the contest to take the CEO position next year.
Covestro, which parent Bayer plans to sell, is holding a capital markets day for analysts and investors on Thursday.
$1 = 0.8763 euros Editing by Maria Sheahan