General Electric Co. is close to reaching an agreement to sell its plastics division for almost $11 billion to Saudi Arabia’s largest industrial company, Saudi Basic Industries Corp., according to reports. If the deal is concluded, the Saudi company known as Sabic, of Riyadh, will have beaten Basell of Hoofddorp, Netherlands, after a long auction process. Several private-equity firms were also interested at one point of time in the firm. The prospective acquisition of the GE division, which has 11,000 employees in 20 countries, would be one of the largest so far by the Saudi company.
Sabic was in a sometimes crowded race, with other top contenders being Basell, the Dutch plastics maker, and Apollo Management, the American private equity firm led by Leon Black. Negotiations were continuing last night, and it was not clear when a final agreement would be signed. Some analysts had expected Sabic to be the lead contestant due to GE’s close association with the Saudi government.
Sabic’s benefit, should it complete the purchase, will come from the Middle East chemical maker’s access to abundant sources of raw materials such as natural gas. The company uses petroleum feedstock provided by state-owned Saudi Aramco, the world’s biggest oil company, apparently keeping its costs lower than US based and European chemical companies. Sabic in April had reported it’s largest-ever quarterly profit and plans to spend $29 billion on expansion by 2010, Moody’s Investors Service said in April.
The unit up for sale makes plastics for automotive parts, computer enclosures, compact disks, telecoms equipment and construction materials and it faced margin pressure in 2006 as a result of the rising price of benzene, an important raw material. A price of $11 billion would definitely exceed some analysts’ forecasts that the plastics business could be worth around $8 billion to $10 billion.
The acquisition of GE’s plastics unit would strengthen the global footprint of Sabic, which is already one of the world’s top 10 petrochemical producers, and give it a effective foothold in areas such as Europe and the US. If Sabic triumphs in the five-month long auction, it would represent an extraordinary takeover victory for a trade buyer against private equity groups. Blackstone, Apollo and Bain Capital had all extended their interest for the division but dropped out at different stages of the contest.
Chief Executive Officer Jeffrey Immelt has put the unit up for sale in January to make an exit from a volatile industry after costs for oil-based chemicals used in manufacturing cut into earnings. Since becoming GE’s CEO in 2001, Immelt has given his consent to $80 billion in acquisitions to enter faster-growing areas including health care. At the same time, strategy of offloading $35 billion of assets such as plastics and insurance that are in volatile markets or are capital intensive adopted.
An acquisition of plastics for a price higher than originally expected may make investors more comfortable with some of the premiums Immelt has paid for GE’s purchases. Experts and analysts have said that GE will most likely reinvest proceeds back into areas that are growing faster, such as oil and gas exploration and health care.
