General Electric’s planned sale of its underperforming GE Plastics unit sparked interest in the deal’s strategic facets and touched off speculation over the sale’s ground rules. In the fourth quarter, the business, which is expected to fetch as much as $10 billion, posted a 49% decline in profits from year-earlier figures. GE contends that the division has been plagued by “continued commodity inflation and competitive challenges.” The crux of its commodity woes is the rapidly escalating price of benzene, a building-block chemical for many plastics. The business racked up sales of $6.7 billion last year, although that represents a mere 4% of GE’s total revenue. The company also acknowledged that the sale is part of its strategy of exiting slower-growth and more-volatile businesses. Mark Demos, a research analyst at Fifth Third Asset Management, which owns a stake in GE, said, “The plastics business doesn’t fit with GE’s grand vision of owning businesses in which it can profit from high barriers to entry, high-tech advantages, and large revenue streams.” He noted that among GE Plastic’s problems is the fact that it’s getting crushed on commodity prices and can’t pass on the price hikes due to industry-wide overcapacity. Clubbing rules spark debate The aspect of the sell-off that has gained the most attention thus far has been the “clubbing rules” that GE and/or Goldman Sachs, which is managing the sale, laid down for potential bidders. Goldman instructed four firms that they can not join up with each other in submitting a bid – Kohlberg Kravis Roberts, Bain Capital, Blackstone Group, and Apollo Management – although they can team up with other buyout firms, as long as they receive Goldman’s approval to share confidential deal documents. At least one of those firms – KKR – is being investigated by the Justice Department for possible collusion in club deals. Some media initially reported that Goldman was shunning any group bids in the sale, which stirred up speculation that the GE Plastics auction procedure stemmed from worries about the Justice Department’s investigation. Goldman insists that its move aims to encourage as many bidders as possible. Club deals basically help buyout shops diversify risk and swing big deals, although they could lead to less competition and, thus, lower offers. Some deal mavens believe that Goldman’s ground rules aim to prevent the most likely buyers – e.g., the four firms operating under the clubbing restrictions – from getting together and limiting competition for the unit. Others still think that the specter of the Justice Department’s inquiry hangs over the sale. Alan Gelband, an independent investment banker based in New York, notes that the seller always has the right to sell to whomever it wants, and adds that Goldman’s procedure is not unusual. In smaller deals, he points out, business owners will often choose a buyer based on non-economic factors, favoring acquirers that will not lay off workers or close facilities. The decision to put restrictions on consortia is no different, he adds. Despite all the talk about the potential financial buyers for the unit, strategic buyers are not expected to sit on the sidelines. The list of possible corporate bidders includes BASF AG, Dow Chemical, DuPont, Rohm & Haas, Saudi Basic Industries, and PetroChina, and a number of them, industry followers remark, can hold their own against PE rivals. Demos questions the wisdom of selling the unit now, when its returns are weakest and high commodity prices are limiting its profitability. Benzene prices were less than $1.00 per gallon during most of the 1990s but rose to more than $3.00 last year. In addition to its commodity-price woes, GE Plastics is being plagued by problems in one of its large markets – the automotive sector. Demos said that with declining oil prices, benzene prices might follow. If a restructured auto industry emerges in the next few years, these customers could drive a rebound for their plastics suppliers. “I’d question the approach of selling the unit when its profit are about as bad as they can get,” he says. Strategic buyers may see structural attractions in the business that could draw them into a bidding war with PE buyers. (c) 2007 Mergers and Acquisitions Journal and SourceMedia, Inc. All Rights Reserved. http://www.majournal.com http://www.sourcemedia.com

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