Monday, May 21, 2007

General Electric to Sell Plastics Division to Saudi Arabia Company

The New York Times
General Electric to Sell Plastics Division

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

The deal for the G.E. 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 being Basell, the Dutch plastics maker, and Apollo Management, the American private equity firm led by Leon Black.

In a statement, Mohamed al-Mady, the vice chairman and chief executive of Sabic, said: “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, the chief executive of G.E., said the sale made equal sense for G.E.

“Sabic is the right owner for our customers and our employees,” Mr. Immelt said. “This transaction will transform the plastics industry by combining Sabic’s low-cost materials position and global reach with GE Plastics’ strong marketing and technology capabilities. Sabic also has a record of investing in acquired businesses and their people.”

Neither the buyer nor the price came as a surprise to analysts who follow General Electric. In January, when G.E. 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, G.E. executives had signaled to analysts that they expected to get $10 billion to $12 billion for the unit, and that it would likely go to a strategic buyer — that is, a company that would utilize the division and its products, rather than groom it for an eventual public offering or resale. Most analysts quickly honed 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 a key raw material for G.E.’s plastics products, that had sucked the profitability out of the unit for G.E. A company like Sabic, with an inexpensive and inexhaustible 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 G.E. In January, G.E. 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. G.E. said it will 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 G.E. portfolio. Many investors have tried to pressure G.E. into selling NBC Universal, the entertainment division that suffered through many quarters of lackluster profits. And there has been widespread speculation that, if G.E. did decide to sell the unit, it would also divest its consumer finance division. The reason is that NBC Universal is part of G.E.’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 G.E. would not want to risk having itself recategorized in investors’ minds.

But NBC Universal’s profits have been rising, and consumer finance is a growing area for G.E., and many analysts say G.E. would have no reason to sell either. Still, while plastics seemed to play no role in G.E.’s vision of its future, it played a huge role in the company’s past. G.E. formed its first plastics department in 1930, and by 1941 it had become the country’s largest plastics producer. In 1953, a G.E. 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 on their journey to the moon in 1969. Four years later, G.E. made the booming plastics department an official division of the company.

Since then GE Plastics has become a major supplier to industries as diverse as automaking, electronics and appliances. Both Mr. Immelt, G.E.’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 increased product prices. For 2006, the plastics division reported about $6.6 billion in revenue, virtually unchanged from the previous year. Profit fell to $674 million, down 22 percent from 2005.