Friday, January 12, 2007

Reliance Industries may bid for GE Plastics

Reliance Industries Limited (RIL) is reportedly planning a bid to acquire the plastics division of US-based industrial conglomerate General Electric (GE). This would be the largest outbound acquisition deal by an Indian company. The last acquisition made by RIL was German specialty polyester manufacturer and market leader Trevira for €80 mn (Rs. 430 crores). Early last year, Reliance Industries had made an unsuccessful $8-billion bid for British Petroleum’s Innovene.

GE Plastics had estimated revenues of $7 bn and is valued at around $10 bn. The plastics division contributes about 8% to GE’s total revenue and 5% to its net profit. However, factors such as increasing raw material costs, rising competition and a downtrend in the automobile industry, have hurt the company’s bottomline in the recent past. In the first three quarters of 2006, GE plastics’ revenue was flat at $5 bn, but operating profit dropped 13% to $560 mn. The possibility of the sale of the plastics business has been speculated for long time ever since GE chairman Jeffrey Immelt hinted that GE might pull out of some of its commodity businesses.

Reliance may not be the only one to bid for the GE unit; global petrochemicals majors such as Dow Chemicals, Rohm and Haas, PetroChina, BASF and DuPont as well as private equity funds, including Apollo Management, Blackstone Kohlberg Kravis Roberts (KKR) should also be interested in acquiring the company. US-based investment banking giant Goldman Sachs has been reportedly mandated by GE to coordinate with private equity firms and other companies interested in bidding for the company’s plastics division.

Reliance’s 3.5 mn tonne plastics business is largely commodity-led. Even though 30% of the volumes are exported, most of it is through the trading route, where margins are relatively low. It has a negligible presence in the superior engineering plastics business, which is largely used by auto components and consumer durable manufacturers. Reliance sees a good strategic fit with GE Plastics, if acquired.

Reliance is said to be exploring options for the bid; possibly a tie-up with Dow Chemicals. The US major has signed a MoU with Reliance to set up a unit in Reliance’s Jamnagar SEZ. In turn, Dow would offer a substantial stake in its struggling petrochemicals unit in the US. A formal announcement is expected anytime. Sources say the bid for GE Plastics is contingent on whether Reliance is able to expand its strategic relationship with Dow Chemicals.

Read the articles in The Economic Times – 1 2 and Business Standard.

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