ZURICH/BERLIN  - Switzerland's Clariant and new anchor shareholder Saudi Basic Industries Corp (SABIC) will merge their high-performance materials businesses and install a SABIC manager as head of the group as they strengthen their partnership.

The new joint venture and governance accord announced on Tuesday mark the first concrete signs of how SABIC's arrival as a white knight in January is reshaping the speciality chemicals group that U.S. activists had targeted.

The partners had agreed that SABIC would not take over Clariant but could boost the 24.99 percent stake it bought from the activists to rescue Clariant from a hostile takeover threat, Clariant Chief Executive Hariolf Kottmann told a news conference.

Reuters reported in June that SABIC, the world's fourth-largest chemicals maker, was considering increasing its holding in Clariant and pursuing joint ventures.

Clariant shares were up 6.1 percent at 0915 GMT, leading the European chemical sector index, after news of the revamp that will let Clariant focus on higher-value speciality chemicals. SABIC shares gained 0.7 percent.

SABIC Specialties Executive Vice President Ernesto Occhiello, 58, will take over next month as chief executive. Kottmann, who is 62 and has been CEO for 10 years, will now become chairman.

Clariant and U.S. group Huntsman last Ocotber abandoned plans for a $20 billion merger, a win for activist investors who fought the deal for months on the grounds it would destroy shareholder value.

 

SALES GROWTH SOUGHT

Clariant will hold a majority stake in the new business, which combines its Additives and high-value Masterbatches divisions with parts of SABIC's Specialties business.

Clariant will divest the remaining Plastics & Coatings business by 2020, it said in a statement.

By 2021, the group aims to generate annual sales of around 9 billion Swiss francs ($9.36 billion), compared with 6.38 billion in 2017, and a margin on earnings before interest, tax, depreciation and amortisation (EBITDA) of around 20 percent.

Kottmann said it was important to gain critical mass in specialty chemicals and said the $15 billion in sales the company could have achieved if it had merged with Huntsman was "still the number which is important for us".

"The move now is a first move into this direction. I'm sure that we will have more opportunities in the years to come to further go into higher value specialities and to strengthen our business areas, for example care chemicals or catalysis or natural resources," Kottmann said.

Middle Eastern companies have been eager to expand into advanced downstream chemicals operations like the catalysts that Clariant produces to help speed up processes at chemicals plants.

Saudi state-owned oil company Saudi Aramco in 2015 bought half the synthetic rubber business of Germany's Lanxess for around 1.2 billion euros.

The moves show that Saudi companies are increasingly trying to raise their influence outside the kingdom as part of the ambitious Vision 2030 plan which was set out by Crown Prince Mohammed bin Salman to diversify the country's economy from oil.

The group said combining operations was set to generate annual synergies of around 100 million Swiss francs over three years from the deal's closing.

It would cost 80 million to implement the plan, which would take force at the start of 2020 and significantly boost earnings per share in the first year.

Under the governance agreement, Clariant's board of directors will expand to 12 members from 10 now, of which four will be nominated by SABIC. Shareholders must approve the change at a meeting set for Oct. 16.

Even including a one-off payment to SABIC to be determined later, its pro forma 2019 net debt to EBITDA leverage ratio should not exceed 2.4 times and leave Clariant's investment-grade debt rating untouched, it said.

Increased earnings quality and operating cash flow will let Clariant at least maintain a steady if not higher dividend every year, it said. ($1 = 0.9619 Swiss francs)

 

(Editing by Keith Weir)