5 key benefits of the Sipchem-Sahara merger

Saudi International Petrochemical Co. (Sipchem) and Sahara Petrochemical Co.’s proposed merger will offer many key benefits, including diversifying feedstock and product base as well as synergies achieved through integrating operations, according to analysts.

Earlier this month, the two Tadawul-listed petrochemical companies signed a non-binding deal to merge, under which  Sipchem will fully acquire Sahara through share swap, issuing 0.8356 new shares for every share held by Sahara’s shareholders.  

Sipchem in March said it would resume merger discussions with Sahara, following changes in the merger and acquisition (M&A) regulatory framework.

The two companies had earlier signed a non-binding memorandum of understanding to start talks for a potential merger in December 2013. However, the negotiations were called off in June 2014, citing “inadequate regulatory framework.”

Below are five main benefits of the proposed merger:

1) Diversified products portfolio

According to a recent report by Riyad Capital, Sahara’s primary products comprise basic petrochemicals such as the ethylene and propylene chain, while Sipchem is engaged in the production of more value added products such as methanol and vinyl acetate. The new entity post-merger will offer the whole range of petrochemical products from basics to value-added.

Reliance on a single product base exposes producers to more risk in revenues and margins, as opposed to diversifying the portfolio, noted another report by Aljazira Capital. “Methanol downstream products are highly competitive, subject to supply and demand forces and price volatility. In addition, Sahara’s earning is significantly affected by the movements of polypropylene prices. Thus, we believe the merger implementation could reduce the risk of performance fluctuations,” it said.

2) Diversifying feedstock

Sipchem’s major feedstock is methane (almost 80 percent), while propane represents the largest proportion of Sahara’s feedstock. According to Aljazira Capital, this could increase the risk associated with subsidy cuts for feedstocks, leading to high volatility in gross margins. The proposed merger, however, would shield against the impact of subsidy reform.

“We believe that the gradual impact of revised subsidy after FY19 may lead in near future to more mergers and acquisitions deals in the Saudi petrochemical sector,” Aljazira Capital said, adding that it expects new subsidy reforms to encourage industry players to concentrate more on overall cost competitiveness, production efficiency and move into value-added manufacturing.

3) Cost reduction

As is typical with mergers of companies in the same sector, the Sipchem-Sahara deal is bound to lead to cost synergies, as administrative, marketing and related functions will be combined, Riyad Capital said. Greater purchasing power will reduce cost of raw materials and a bigger balance sheet will reduce financing costs.

“Furthermore, merged companies can share office space and eliminate duplicate manufacturing facilities,” the report said.

4) Integration

The proposed merger will support Sipchem to increase its self-sufficiency in basic chemicals by securing access to ethylene feedstock via Sahara’s associate (SEPC), Aljazira Capital said. Currently, Sipchem affiliate International Polymer Company gets its main feedstock (Ethylene) from Jubail United Petrochemical Company, a SABIC Affiliate.

On the other hand, Sahara can expect to benefits from Sipchem’s logistics and its marketing arms in Europe and Asia; hence, the integration could also open up new markets and streamline the supply chain of Sahara products.

5) Moving up the league table

A combined Sipchem-Sahara entity will rise up the league table in the Saudi petrochemical sector, Riyad Capital said. In terms of net income for 2017, Sipchem ranked 11th while Sahara ranked 10th. Assuming a simple summation of net income and assets retrospectively, the combined Sipchem-Sahara entity will rank 6th and 7th in the industry in terms of net income and assets, respectively.

Write to Jerusha Sequeira at jerusha.s@argaamnews.com