Saudi company to buy GE's plastics division

Sabic beats out rivals with $11.6 billion deal, has cost-savings edge on oil-derived benzene

May 22, 2007|By New York Times News Service.

General Electric Co. agreed yesterday to sell its plastics division for $11.6 billion to the largest public company in Saudi Arabia, the Saudi Basic Industries Corp.

The deal for the GE division, which has 11,000 employees in 20 countries, is one of the largest yet by the Saudi company, known as Sabic. Sabic prevailed in a sometimes crowded race, with other top bidders including Basell Holdings BV, the Dutch plastics maker, and Apollo Management, the American private equity firm led by Leon Black.

Mohamed al-Mady, vice chairman and chief executive of Sabic, said in a statement: "This business is complementary to our existing business without any overlaps. Sabic's intention is to grow the business globally."

In a separate statement, Jeffrey R. Immelt, chief executive of GE, said the sale made equal sense for GE.

"Sabic is the right owner for our customers and our employees," Immelt said. The merger, he said, combined "Sabic's low-cost materials position and global reach with GE Plastics' strong marketing and technology capabilities."

Shares of GE rose 14 cents, to $37.10.

Neither the buyer nor the price came as a surprise to analysts who follow GE. In January, when GE confirmed long-standing rumors that it was putting its plastics business on the block, most analysts expected the unit to go for $8 billion to $10 billion, and for the probable buyer to be a private equity firm.

But in recent months, GE executives had signaled to analysts that they expected to get $10 billion to $12 billion and that the business would probably go to a strategic buyer - that is, a company that would make use of the operation and its products, rather than groom it for an eventual public offering or resale.

Most analysts quickly homed in on Sabic, because of its access to Saudi Arabia's vast petroleum supplies. After all, it was the ever-rising cost of benzene, a petroleum derivative and an essential raw material for GE's plastics products, that had sucked the profitability out of the unit for GE. A company like Sabic, with an inexpensive and vast supply of benzene, could far more easily turn a profit.

The sale, which is expected to close in the third quarter, is unlikely to have much of a strategic impact on GE. In January, GE agreed to spend $4.8 billion to buy the aerospace business of the Smiths Group, $1.9 billion to buy the oil and gas operations of Vetco Gray and $8.1 billion to buy a diagnostics business from Abbott Laboratories. GE said it would use most of the proceeds from the plastics sale to buy back stock, but analysts expect that some of the money will be used to pay for those acquisitions.

It is also unlikely that the divestiture is heralding a larger-scale trimming of the GE portfolio. Many investors have tried to pressure GE into selling NBC Universal, the entertainment division that has suffered through many quarters of lackluster profits.

There has been widespread speculation that if GE did decide to sell the unit, it would also shed its consumer finance division.

The reason for that speculation is that NBC Universal is part of GE's industrial group, and a sale would skew the company's portfolio too far toward financial products. Shares of financial services companies generally trade at lower multiples than those of industrial companies, and GE would not want to risk having itself recategorized in investors' minds.

NBC Universal's profits have, however, been rising, and consumer finance is a growing area for GE, so many analysts say GE would have no reason to sell either.

While plastics seemed to play no role in GE's vision of its future, they played a huge role in the company's past. GE formed its first plastics department in 1930, and by 1941 it had become the country's largest plastics producer. In 1953, a GE scientist discovered a high-strength polycarbonate that the company branded Lexan. To this day Lexan is a huge seller, used for bulletproof glass, water bottles and even Apple iPods. Neil Armstrong and Buzz Aldrin were wearing Lexan visors during their historic walk on the moon in 1969. In 1973, GE made the booming plastics department an official division of the company.

GE Plastics has become a major supplier to industries as diverse as automaking, electronics and appliances. Both Immelt, GE's current chairman, and John F. Welch Jr., his predecessor, worked at the plastics group.

But competition and price increases in raw materials have squeezed profit margins, even though the unit raised prices. For 2006, the plastics division had about $6.6 billion in revenue, virtually unchanged from the previous year. Profit fell to $674 million, down 22 percent from 2005.

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