SABIC has signed an agreement with Japan Saudi Arabia Methanol Company (JSMC) to buy 50% of JSMC shares in Ar-razi (25% stake) for USD150mn after JSMC’s foreign partnership agreement with SABIC expired on 29 Nov 2018. JSMC will retain the rights to the remaining 25% stake via a 20-year partnership extension, but will pay USD1.35bn to do so. After the proposed deal, SABIC would own 75% of Ar-razi, while JSMC will own 25%. Note that SABIC plans to use some or all of the proceeds to refurbish or replace Arrazi’s existing production plants and that as part of the agreement, SABIC will become an equal co-owner in a new more efficient methanol technology to be commercialised. The contract term enables JSMC to sell its remaining 25% stake to SABIC (for USD150mn) prior to 31 March 2019, in which case SABIC would no longer receive the proceeds nor the equal ownership in the new methanol technology. 
 
Our take: We like the strategy and the deal looks highly favourable
The deal looks very favourable to SABIC given that they only paid USD150mn for the 25% stake, while JSMC had to pay USD1.35bn and offer SABIC a partnership in its new methanol technology in order to retain its 25% stake. Note that Ar-razi is a massive facility with close to 5mn tonnes per annum (mtpa) of methanol production so USD150mn for a 25% stake is an extremely low price, in our view. 
 
This is the second such transaction executed by SABIC as the company also bought out their foreign partner in SADAF in early 2017. As was the case with that transaction, the deal on its own is not a game changer given how large SABIC is, but we like the strategy overall and executing several of these could start to add up on the bottom line. These type of deals always end up favourable to SABIC because once the foreign partnership agreement expires, SABIC technically has all the bargaining power and can leverage their position to maximise value, such as this deal where they were able to get equal rights to a new methanol technology. Overall, we view the deal as highly accretive and believe that buying out their foreign partners is an ideal way for the company to grow its bottom line gradually at minimal cost. 

Yousef Husseini
 
SABIC: SAR121.40 as of 4 Dec. 2018, Rating: Neutral, TP: SAR125.00/share, MCap: USD97,120mn, SABIC AB/2010.SE