For 77 years, the letters ``GE'' and the word ``plastics'' have been linked. That's going to come to an end later this year, when General Electric Co. finalizes the sale of its venerable plastics unit to Saudi Basic Industries Corp. for $11.6 billion.
Fairfield, Conn.-based GE confirmed the deal May 21. Sabic - a petrochemicals firm majority-owned by the Saudi Arabian government - outbid at least two other finalists to make the deal. Industry watchers had expected the Pittsfield, Mass.-based unit to sell for between $8 billion and $10 billion.
``GE selected Sabic as the winner of this auction both for price as well as the company's premier position as one of the world's fastest-growing, innovative companies,'' GE Chairman and Chief Executive Officer Jeff Immelt said in a May 21 news release.
Sabic ``has a long-term, strategic interest in the people, communities, customers, products, plants and technology of GE Plastics,'' Mohammed Al-Mady, Sabic vice chairman and CEO said in the release.
Meet the new boss
``For our customers, it will be business as usual, with the same products and the same level of service,'' said Brian Gladden, the GE Plastics executive who will serve as president and chief executive officer of the unnamed new firm.
Gladden currently is vice president and general manager of GE Plastics' flagship product: Lexan polycarbonate. GE Plastics President and CEO Charlene Begley will move on to a new role at GE.
Gladden, an 18-year GE veteran who has been with the plastics unit since 2000, said in a May 21 phone interview that during the negotiations, there was ``no discussion about splitting up [GE Plastics] or selling off pieces.''
Officials with both GE Plastics and Sabic also have indicated that the firm's 450-employee headquarters in Pittsfield will remain in place.
``These are all key assets to our business,'' Gladden said. ``And in Sabic, we have an owner with a high standard of safety that understands the business and buys into our strategy, and that has access to feedstocks that can prove beneficial for us.''
Sabic - with 2006 sales of $23 billion and profit of $5.2 billion - employs about 215 in the U.S., at a headquarters in Houston, a research center in Sugar Land, Texas, and a joint venture technology center in Little Ferry, N.J.
The 31-year-old firm has been in an intensive growth mode for several years, as demand for its plastics and chemical products has soared in China and other parts of Asia. Saudi Arabia's massive oil and natural gas reserves give Sabic a major feedstock advantage vs. producers in other parts of the world. For example, its natural gas costs are under $1 per unit, while U.S. natural gas futures for July were near $8 per unit in late trading May 23.
In 2002, Sabic bought the European plastics business of DSM NV for $2 billion. Earlier this year, it bought a British plastics unit from Huntsman Corp. for almost $700 million. In China, Sabic is planning a $5 billion plastics and chemicals complex. Details of that project still are being worked out with the Chinese government.
Learning from the past
Sabic has no North American production sites, but now takes hold of an 11,000-employee global operation that has been almost synonymous with engineering plastics since GE chemist Dan Fox discovered polycarbonate in 1953.
(In one of the plastics industry's biggest quirks, researchers at Bayer AG in Germany claim to have made the same invention that same year. The two firms now share the credit, but Fox is widely recognized for the feat throughout North America.)
GE Plastics is a global leader in the production of PC, ABS and other engineering resins. PC is used in CDs, DVDs and a wide variety of automotive, industrial and electronic parts. The unit rang up a $674 million profit last year on sales of $6.7 billion.
Fairfield, Conn.-based GE had decided to sell the unit earlier this year, as higher feedstock costs, particularly for benzene, began to affect its profitability. GE Plastics' 2006 profit was down 22 percent from the prior year.
The unit's plastics history extends well before Dan Fox. GE's molded plastics, laminates and phenolic resin efforts were combined into a plastics unit in 1930, but the firm's plastics activities date back to 1909, when it licensed Bakelite - the phenol/formaldehyde hybrid that's considered the world's first synthetic plastic - from its creator, independent inventor Leo Baekeland.
Baekeland had brought the product to Willis Whitney, who ran GE's first-of-its-kind research lab in Schenectady, N.Y., for 32 years. To the scientists he hired, Whitney often said: ``I did not come to Schenectady to create a philanthropic asylum for indigent chemists.''
GE soon came up with plenty of its own plastic products, urged on by a 1912 letter sent by GE technologist Charles Steinmetz to the Pittsfield lab, urging it to work on new flexible insulating resins. At the outset, insulation was the name of the game for GE's plastics efforts.
``GE became involved with chemistry because the wires, connectors and equipment that carried and used electricity had to be insulated; that is, covered with something that kept the electricity in,'' longtime GE executive Jerome Coe wrote in Unlikely Victory: How General Electric Succeeded in the Chemical Industry, a history that was published in 2000.
During its history, GE Plastics has had an impact on GE's corporate leadership ranks. Superstar executive Jack Welch began his GE career in Pittsfield in 1960 and spent 11 years with the plastics business. He took over the top spot at the parent firm in 1981.
Current GE CEO Immelt's stay in plastics also covered 11 years, spread out over two separate stints of a GE career that began in 1982. He took the helm at GE when Welch retired in 2001.
Deal draws early praise
Fast-forwarding to 2007, several plastics industry watchers said the GE Plastics-Sabic deal is a good fit.
``This is the best way for Sabic to get into the engineering plastics business,'' said Jignesh Shah, a market analyst with Chemical Market Resources Inc. in Houston. ``If you're not in that business, you can't start from scratch because there are a lot of established players, and establishing channels to market isn't very easy.
``You need to identify end users and understand the technology requirements. GE Plastics offers all of that to Sabic. It's not like a commodity business where you have a cost advantage and you've got it made.''
``GE Plastics is a really good, strong, technology-driven business,'' added Robert Bauman, a market analyst with Nexant Inc. in Houston. ``Sabic may take that technology and build plants and become a superplayer in the global chemical industry. There's no doubt they want to branch out beyond commodities.''
``My gut feeling is that Sabic is the best of all the candidates that were looking to buy GE Plastics,'' said Jack Avery, who spent 34 years with GE Plastics before retiring in 2004.
Sabic is ``basic in raw materials, they've got a wide-ranging portfolio, they're not a competitor and they can offer relief on raw material prices,'' said Avery, who now runs Avery Plastic Consulting in Salt Lake City. ``That's going to provide them with an advantage, especially in China, and will position Sabic with a worldwide portfolio.''
A possible wild card in the deal is the possibility that the U.S. government might intervene and stop the sale, as it did in 2005 when political opposition prevented a Chinese national oil company from buying oil firm Unocal Corp.
``It's hard to predict what will happen when politics are involved,'' Gladden said of that possibility. ``But we'll do everything we can to be prepared. We'll do our homework.''
CMR's Shah said that government approval ``doesn't seem like a problem.'' GE Plastics ``is a simple chemical industry business that doesn't affect national security,'' he said.
And while removing GE Plastics from the historic GE umbrella might be disappointing to some longtime North American players, Avery said changing market conditions made a sale inevitable.
``It was obvious that GE Plastics wasn't fitting in with GE's strategy for a pretty easy reason - profitability,'' Shah said. ``With the energy crisis we've had the last few years, GE Plastics couldn't make a commitment to GE corporate on profit.
``One of the things that's unacceptable at GE is if you make a commitment to profit and don't meet it, because that gets into GE's estimates from Wall Street. Two weeks from the end of the quarter, you can't say you're not going to make it.''
GE Plastics' Gladden added that the new company ``is going to look at'' the possibility of using GE's distribution channels to market Sabic's polyolefin products in North America. Although Sabic ranks as the world's third-largest producer of high density and linear low density PE, the Riyadh-based company has a very low sales profile in North America.
But Nexant's Bauman, for one, doesn't see that happening.
``GE Plastics doesn't have an extra 5,000 rail cars and they have a different customer base,'' he said. ``GE's customers aren't polyethylene film companies.''
GE Plastics also generates about $300 million in annual sales from a traditional plastics processing business, making its own sheet and film products based on PC and other resins. CMR's Shah said those businesses might not fit with Sabic.
``Those might be too far downstream for Sabic,'' he said. Sabic ``has been evaluating downstream products in the Middle East for a long time but hasn't done anything.''
But Avery countered that the business model Sabic had looked at overseas is different from the one GE Plastics uses to make film and sheet.
``Downstream products like Lexan [PC] or Ultem [polyetherimide] sheet can be profitable without large volumes,'' he said. You can't do that in commodity polyolefins.''
In the crystal ball
The unanswerable $11.6 billion question is whether Sabic's Riyadh headquarters will extend a heavy hand over Pittsfield - or rule with a light touch.
``I think Sabic will leave the business intact,'' CMR's Shah said. ``The question is, does GE still stay as innovative?''
Avery - who saw GE Plastics grow globally while reducing its presence in Pittsfield from 12,000 employees in the early 1970s to 450 today - said that Sabic knows what it is getting.
``GE Plastics is a well-run, profitable business that has a market advantage,'' he said. ``That's why Sabic paid a premium for it.''
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$674 million GE Plastics' 2006 profits
$80 billion Sabic's net worth
70% Saudi government stake in Sabic
11,000 employees at GE Plastics worldwide
19,000 employees at Sabic worldwide
Sources: Saudi Basic Industries Corp., General Electric Co.