Saudi Basic Industries Corp., the world’s biggest chemical company by market value, will buy General Electric Co.’s plastics unit for about $11 billion, two people familiar with the negotiations said.
The deal will be a record for Gulf region, with the price above the $8 billion to $10 billion estimated by some investors. The purchase may be announced as soon as today, said one of the people. Both requested anonymity because a decision hasn’t been made public.
Saudi Basic, known as Sabic, has doubled sales since 2002 because of its unparalleled access to the world’s biggest reserves of oil, used as a raw material in the production of plastics and petrochemicals. The Riyadh, Saudi Arabia-based company announced a record profit in April. GE, by contrast, put its plastics unit up for sale in January after the soaring cost of crude cut into earnings.
“GE is using a very favorable market to sell the asset,” said Mark Demos, an analyst at Fifth Third Asset Management in Minneapolis, which owns more than 11.4 million GE shares. “They’re ridding themselves of a cyclical business, and cyclical businesses don’t have a big place in this company’s future.”
Shares of Sabic have gained 19% this year, giving the company a market value of 313.8 billion riyals ($84 billion). BASF AG, the biggest chemical company by sales, is valued at 44.2 billion euros ($60 billion).
Sabic stock wasn’t trading today, the Saudi weekend. The government owns about 70 percent of shares, with the rest restricted to investors in Saudi Arabia and the five states of the Gulf Cooperation council.
Sabic, U.S. buyout firm Apollo Management LP and Dutch plastics company Basell NV, a unit of New York’s Access Industries Inc., had been leading the bidding for GE Plastics with offers of more than $10 billion, people familiar with the auction process said earlier this month. The decision to sell to Sabic was made by GE’s board yesterday, two of the people said.
Data compiled by Bloomberg shows that the deal is the largest in the Gulf and second-biggest in the Middle East, behind Egyptian billionaire Naguib Sawiris’s 12.2 billion-euro ($16.5 billion) purchase of Wind SpA through his Weather Investments Srl holding company in 2005.
Sabic Chief Financial Officer Mutlaq Al-Morished declined to comment when contacted by mobile phone today. GE spokesman Gary Sheffer also declined to comment, as did Basell spokesman Mark Mendelson and Steve Anreder for Apollo.
Compact Discs, Helmets
GE Plastics posted $674 million in profit on $6.65 billion in sales in 2006. The Pittsfield, Massachusetts-based division makes plastic used in everything from compact discs and automobiles to astronaut helmets.
Sabic’s advantage, should it complete the purchase, will stem from its access to abundant sources of feedstock from state-owned Saudi Aramco, the world’s biggest oil company. The chemical maker exploits the natural gas released during oil extraction and once burned at the wellhead to achieve costs lower than at U.S. and European competitors. Sabic’s investments in capacity expansion are expected to reach $20 billion by 2009 as it seeks to move beyond its Saudi Arabian base and establish manufacturing facilities closer to its customers.
The late King Khalid bin Abdulaziz established Sabic in 1976 with the aim making Saudi Arabia less dependent on oil. Once run from a small office with a handful of employees, it has grown to become the largest public company in the Middle East, employing 17,000 people. Production capacity totals about 42 million metric tons, almost 20 percent more than in 2001.
The online edition of the Wall Street Journal said yesterday that Sabic had agreed to buy the plastics division, which still makes products developed from founder Thomas Edison’s experiments. GE Chief Executive Officer Jeffrey Immelt and predecessor Jack Welch held management jobs at the unit early in their careers.
Since becoming GE’s CEO in 2001, Immelt has agreed to $80 billion in acquisitions to enter faster-growing areas including health care, while divesting $35 billion of assets such as plastics and insurance that are in volatile markets or are capital intensive.
A sale of plastics for a price higher than originally anticipated may make investors more comfortable with some of the premiums Immelt has paid for GE’s purchases, Demos said.
Shares of GE, the world’s second-largest company by market value behind Exxon Mobil Corp., fell 30 cents to $36.53 on May 18 in New York Stock Exchange composite trading. The shares have risen 6.1% in the past year.
Last month, Immelt told investors he wanted to announce a buyer for plastics in the second quarter and complete the divestiture in the third. GE, also the world’s biggest maker of power generation equipment and services, signed more than $2 billion in contracts in the past six months for turbines and desalination systems for Saudi Arabia.
GE will probably plow proceeds back into areas that are growing faster, such as oil and gas exploration and health care, analysts including Citigroup Inc.’s Jeffrey Sprague said in notes to clients this year. New York-based Sprague, the top-rated analyst in an Institutional Investor magazine survey, rates GE a “buy.”
A sale may slice 3 cents to 4 cents a share off profit in 2007, Sprague said. He estimates full-year earnings of $2.22.
GE Plastics was created in 1930 out of experiments with plastic filaments for light bulbs conducted by Edison in 1893, according to GE’s Web site. It’s currently run by Charlene Begley, 40, one of the highest-ranking women at the company.
Management Test Bed
Fairfield, Connecticut-based GE has pushed executives through the division in order to test their managerial mettle. In his memoir, “Straight from the Gut,” Welch recounted one of his earliest management experiences: An explosion in a factory he was responsible for and how his immediate boss encouraged him to solve the problems that led to the blast rather than punish him for it.