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Shares in Sahara Petrochemicals and Saudi International Petrochemical Company (Sipchem) rose 3.64 percent and 0.71 percent respectively during trading on Wednesday, after the two companies announced to the Saudi Exchange that they had “entered into a non-binding memorandum of understanding (the "MOU")” to effect a business combination.
The announcement also cited strategic benefits that are expected to be delivered to the combined business.
“The proposed transaction is a win-win for both the names over the long term,” Nitin Garg, a senior analyst at Bahrain-based SICO, told Zawya by email.
Under the terms of the MOU, Sipchem would buy-out shares in Sahara. The company would increase its share capital by 50 percent, or 366,666,666 shares, bringing the total to 733,333,332 shares. It would then offer Sahara shareholders 0.836 Sipchem shares for every Sahara share held, meaning shareholders of each of the current companies would each share 50 percent of the combined entity.
Shares in Sipchem have added 30.09 percent so far this year, while Sahara has gained 10.61 percent.
The Saudi index ended the day 0.35 percent higher on Wednesday and has now added 10.85 percent since the start of the year.
Oil prices also made gains due to fears of supply tightening as a result of sanctions set to be imposed on Iran by the United States from November. This has pushed oil prices to levels not seen for four years, with Brent crude hovering near $85 on Monday.
The surge in oil prices has been the main driver behind the petrochemical sector in Saudi Arabia (read more here). One-month Brent crude futures have increased in value by 27.2 percent since the start of the year and were trading at $84.63 at 1423 BST on Wednesday.
“The combined entity has synergy potential as industrial assets of both Sipchem and Sahara are in Jubail. In our view, the combined entity is likely to have a more balanced basic chemicals and downstream exposure,” Garg added.
“On one hand, the merger will increase Sipchem’s scope from downstream products to basic olefin and polyolefin products. While on the other hand, Sahara facilities will be in a better position to utilize Sipchem logistics and distribution network. “
“According to yesterday closing prices of both the names, the swap ratio values Sahara at 18.8 Saudi riyals, which is 7 percent higher than its yesterday closing price of 17.6 riyals,” SICO’s Garg concluded.
Elsewhere in the region, Dubai’s index closed 0.84 percent lower on Wednesday, Abu Dhabi’s index gained 0.15 percent, Kuwait’s index added 0.1 percent, Bahrain’s index edged up 0.03 percent, Qatar’s index gained 0.74 percent and Oman’s index dropped 0.43 percent.
(Reporting by Gerard Aoun; Editing by Michael Fahy)
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© ZAWYA 2018
