Sipchem and Sahara Petrochemicals study merger

11 June 2013

Merged company could offer more diversified products

Saudi International Petrochemical Company (Sipchem) and Sahara Petrochemicals Company (SPC) are conducting a feasibility study for a merger, the companies announced on 4 June.

The two companies share their two largest shareholders – Zamil Holding Group, a family business, holds a 9.6 per cent stake in Sipchem and a 7.9 per cent stake in SPC. The government’s Public Pension Agency holds a 7.7 per cent stake in Sipchem and a 5.9 per cent stake in SPC. Abdulaziz al-Zamil acts as the chairman of both companies’ boards.

A merged company could create a more diversified range of products, likely focusing on delivering specialised derivative petrochemical products. Both companies currently create single products. Sipchem’s main revenue comes from generating methanol, while SPC’s main product is polypropylene.

“The new company will benefit from the complementary products of both current companies. To compete globally, it is essential for the Saudi petrochemical companies to compete without relying on government-subsidised energy prices, because these are not expected to last forever,” said Turki Fadaak, research and advisory manager at Al-Bilad Investment Company.

The Saudi petrochemicals sector traditionally mainly focused on selling basic olefins, profiting from a low cost of feedstock. However, with the possibility of a rise in local feedstock prices, the sector is looking at producing more value-added products rather than increasing the capacity of low-margin basic olefin products.

This year, Sipchem plans to start producing ethyl vinyl acetate (EVA) films, used to manufacture solar cell plates, once its plant is up and running. SPC will be launching four joint venture projects over the next few years, which will produce downstream petrochemicals.

According to the local Al-Rajhi Capital, the potential merger could help optimise leverage levels and increase operational efficiency.

“We believe a merger would lead to a matching of funds’ availability with requirement. Sipchem’s leverage levels have been increasing over the past few quarters and its net debt-to-equity ratio stood at 66 per cent at the end of first quarter of 2013. We can expect debt levels to go up even further.

“SPC’s leverage levels on the other hand are nominal with net debt-to-equity ratio of around 16 per cent at the end of the first quarter of this year. With most of its capex coming to a completion, we expect the net debt-to-equity ratio levels to turn negative, soon resulting in cash being accumulated,” it said in a research report on 9 June.

Sipchem earlier announced it is planning to raise SR257.5m for building a polybutylene terephthalate plant and SR1.5bn-2bn through a sukuk offering to fund its phase three expansion.

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