Tasnee announced after session yesterday that it had come to an agreement to sell Cristal (79%-owned TiO2 subsidiary) to Tronox Ltd for a cash consideration of USD1.673bn (SAR6.274bn) and a 24% share in Tronox shares via the issuance of 37.58mn new shares. Closing of the deal is expected to occur within 15 months, and the new entity will be run by Tronox CEO, Tom Casey. Note that the closing of the transaction is subject to certain conditions including regulatory and governmental approvals. Cristal’s debt does not appear to be part of the deal, with Tasnee’s release noting that the cash consideration from Tronox will be used to fully pay off Cristal’s outstanding debt of SAR6.274bn in Saudi Arabia before the asset is transferred to Tronox.    According to Tasnee’s release, the deal includes but is not limited to the sale of a) all international subsidiaries of Cristal Arabia; b) assets (including the Yanbu plant of Cristal) and liabilities relevant to such business; and c) contracts, intellectual property and goodwill with regard to such business (the Cristal Assets). However, based on the release from Tronox, subject to negotiations with Cristal, Tronox intends to acquire Cristal’s TiO2 slag unit in Jazan as well, implying those assets are currently not a part of the deal.   What will the combined entity look like? The combined entity will become the world’s largest TiO2 producer with a total production capacity of 1.3 mn tonnes across 11 plants in eight countries. Management of both companies estimate pre-tax run rate synergies of more than USD100mn in year 1 and more than USD200mn in year 3.   Our take: We are positive on the deal If the transaction were to go through, we would be positive on the deal, especially from a strategic perspective. On the value front, using a back-of-the envelope calculation, the deal appears accretive at first glance, at least relative to where Tronox is currently trading and our target price. Essentially, the market cap of Tronox currently stands at around USD2.3bn (SAR8.5bn), and we value Cristal at an equity value of SAR3.4bn (Tasnee’s share SAR2.7bn), implying a combined value of the two entities of SAR11.9bn before the SAR6.3bn cash injection into Cristal, adjusting for that the deal value would become cSAR18.2bn. With Tasnee effectively owning 18.96% of the new entity (79% of the 24% ownership), this implies a value to Tasnee of SAR3.4bn, a 28% premium to our current fair value of SAR2.7bn pre deal. The calculation is not perfect by any means, but it also does not account for the slag unit (cost cSAR3bn), so this provides some margin of error and, on the whole, we do believe the deal is accretive. This does not necessarily imply a huge amount of extra value at the Tasnee level, but we think beyond the monetary benefits of the sale, the deal offers other positives (see next paragraph).     More than the value of the deal, we really like the transaction from a strategic perspective, as this would remove a large drag on the bottom-line (Tasnee’s Industrial division, primarily composed of Cristal lost SAR392mn on the EBIT level in 2016), which should help unlock the value of the petrochemical assets. Essentially, Tasnee’s current market cap is SAR11.3bn, removing the implied Tronox investment value of SAR3.4bn would imply that the petrochemical assets are being valued at cSAR7.8bn. We estimate that in 2016, Tasnee’s petchem assets generated around SAR800mn in bottom-line earnings (excludes holding S,G&A), implying that these assets would now be trading at 9-10x trailing P/E and likely an even lower multiple in 2017, given the recent improvement in oil prices, much lower than the sector average of 14-15x.   Furthermore, the deal helps Tasnee to de-lever its balance sheet, which has been a major concern of ours for the past few years and will allow management to focus on the petrochemical side of the business, which is where they have the most experience (Tasnee’s CEO was previously SABIC’s CFO), while Tronox’s management can focus on adding value to the TiO2 business. In addition, Tasnee could still sell the TiO2 slag unit to Tronox, adding further value to shareholders.   Overall, we believe the deal would be accretive to shareholders over the coming years and think that, strategically, this was the right move, given the state of Tasnee’s balance sheet (2016 net debt to EBITDA of 6x) and the large losses generated from the operation in the past two years. (Company disclosure, Yousef Husseini)   National Industrialization Company: SAR16.87 as of 21 Feb. 2017, Rating: Neutral, TP: SAR14.50/share, MCap: USD3,009mn, NIC AB/2060.SE