LyondellBasell will acquire a 50% stake in Sasol’s US-based polyethylene plants and associated infrastructure for a total of $2 billion as part of a a 50/50 joint venture (JV).
LyondellBasell (LYB) shares surged 6% on Friday. Under the terms of the transaction agreements, each JV partner will provide pro-rata shares of ethane feedstocks and will offtake pro-rata shares of cracker and polyethylene (PE) products at cost. LyondellBasell will operate the US-based chemicals assets on behalf of the JV.
The JV will operate under the name Louisiana Integrated PolyEthylene JV LLC. The multinational global chemical company said that the the agreement includes customary rights for each partner regarding the potential future sale of its ownership interest.
LyondellBasell is the world’s largest owner of polyethylene and polypropylene technologies, and derives much income from licensing their production. The company is also heavily involved in the ethylene, propylene, and polyolefin markets.
As part of the JV, Sasol, a South African petrochemicals company, will retain full ownership and control of its Lake Charles Research and Development complex, Lake Charles East Plant ethane cracker and US chemicals business assets in Lake Charles, which produce Ziegler alcohols and alumina, ethoxylates, Guerbet alcohols, paraffins, and ethylene glycol. Sasol said that the transaction will help the company to cut net debt and rapidly shift its portfolio towards specialty chemicals.
The transaction, which is subject to regulatory approvals and approval by Sasol shareholders, is expected to close by the end of 2020.
Shares in LyondellBasell have lost 24% so far this year. Commenting on the deal, Alembic Global analyst Hassan Ahmed said that from a strategic perspective the deal provides LyondellBasell with “brand new, world scale and advantaged assets in the US without taking on execution risk at what appears to be a bottom of the cycle attractive valuation”.
“On a valuation basis the deal appears to be attractive with LyondellBasell purchasing these assets at an over 30% discount to greenfield replacement costs associated with the new builds we have seen recently in the US,” Ahmed wrote in a note to investors. “Assuming LyondellBasell funds this transaction entirely with debt we see the deal being around 13% accretive (ex-synergies) to our 2021 EPS. The accretion figure is sensitive to the allocation of debt to this JV.” (See LYB stock analysis on TipRanks)
However, for now the analyst remains sidelined on LYB with a Hold rating and a $85 price target (18% upside potential) saying that there is still no “clarity on the allocation of debt associated with the JV so it is difficult to ascertain the exact enterprise value of the JV”.
The rest of the Street is cautiously optimistic on the stock. The Moderate Buy analyst consensus is split between 6 Buys and 8 Holds. The $76.64 average price target implies 6.1% upside potential over the coming year.
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