Sahara and Sipchem have entered into a legally binding agreement to commence a business merger between the two parties, in which Sipchem will acquire all Sahara shares in exchange of shares in New Sipchem (“Sahara International Petrochemical Company”) with an exchange ratio of 0.8356, unchanged from the previous announcement. Our view on the transaction has not changed, as we still see little operational synergies, with the main benefits stemming from: i) cost savings from the administrative and marketing sides; ii) larger balance sheet with more firepower; and iii) increased MSCI flows as the combined entity would, theoretically, qualify for the mid-cap index, while as the individual entities would fall under the small-cap index. Once the transaction is complete, each company will own 50% of New Sipchem, which, at the current market price, implies a 4% premium for Sahara (4% discount for Sipchem), while on our valuations (Sipchem TP: SAR26/share, Sahara TP: SAR18.5/share), it would imply a 9% premium for Sahara (7% discount for Sipchem), so the deal appears to be slightly favourable to Sahara (though not by much), which could be due to control premium as most of Sipchem’s management will remain in place (including the CEO and the Chairman of the board). 
 
Based on the company release, the rationale for the transaction is to: i) strengthen the product portfolio; ii) diversify feedstock supply; iii) increase scale and resilience of the business; and iv) enhance productivity and efficiency across the combined assets. The companies will publish the full details of the transaction with their offering circular soon, but in the meantime, see some more details and highlights below.
 
When will the transaction close? The transaction will be complete once all closing conditions are met, expected to occur by 30 Jun 2019 – or in any event before the Long Stop Date, defined as 150 days after CMA gives approval of the offer document or 12 months from the date of the Implementation Agreement (6 Dec 2018). Note that if the Long Stop Date expires, the Implementation Agreement becomes invalid and both companies can walk away.
 
Closing conditions:
        Approval of regulatory authorities, including CMA, Saudi Arabian General Authority for Competition, and the Saudi Stock Exchange. 
        Approval by Sahara’s and Sipchem’s independent and non-conflicted shareholders (e.g. excluding Zamil and PPA, which own shares in both companies). This will be done via an EGM (date not yet set) and will require 75% of shareholder approval of both companies. Al-Zamil and PPA will not be allowed to vote on the transaction but will be counted towards quorum for the EGM.
        There will be no material adverse change to the financial condition of either company.
        Both companies should comply with the requirements set out in the Implementation Agreement.
 
Are there any break-up fees? There is no mention in the released document of any break-up fees, with the document only discussing conditions upon which the Implementation Agreement becomes invalid or void, without discussing any potential penalties in relation to this. At this time, it is unclear whether there is a break-up fee or not.
 
How will the new management and Board look? The CEO of the group will be Ahmed Al-Ohali, Sipchem’s current CEO, while Sahara’s CEO, Saleh Bahamdan, will become the new company’s Chief Operating Officer (COO). It is not clear if Sipchem’s CFO will remain in place, as the document does not make reference to it.
 
New Board:
        Chairman of the board will be Abdul Aziz Al Zamil, current Chairman of Sipchem
        Two Board members from Zamil Group (9.7% ownership in Sipchem, 7.91% ownership in Sahara) inclusive of the Chairman of the board
        One member from the PPA (7.75% ownership in Sipchem, 6.65% ownership in Sahara)
        Four members from the existing Sipchem Board, excluding representatives from Zamil and PPA
        Four members from the existing Sahara Board, excluding representatives from Zamil and PPA
        A new Vice Chairman of the Board will be appointed from amongst its members
 
Dividend distributions: The document notes that dividend distributions for 2H18 will be limited to SAR240mn or less. This could mean Sipchem could pay up to SAR0.65/share in dividends in 2H18, slightly higher than SAR0.5/share in 1H18 and implying a yield of  5.5% for FY18 (note that we forecast a dividend of SAR0.5/share for 2H18, so this provides some potential upside to our estimate). There is no guarantee the company will do this, but we find the mention of the dividend cap interesting, given that Sahara already announced a dividend of SAR220mn for 2H18, which could imply that the cap limit will be more relevant to Sipchem once it makes its dividend announcement. 

Yousef Husseini
 
Sahara Petrochemicals: SAR16.44 as of 6 Dec. 2018, Rating: Buy, TP: SAR18.50/share, MCap: USD1,924mn, SPC AB/2260.SE
 
SIPCHEM: SAR20.72 as of 6 Dec. 2018, Rating: Buy, TP: SAR26.00/share, MCap: USD2,026mn, SIPCHEM AB/2310.SE