Koch Industries, the world's second-largest private company, plans to team up with private equity firm Blackstone Group to join the bidding for GE Plastics, according to sources close to the process.
The auction for GE Plastics, a unit of General Electric , comes
amid concern that the profitability of the unit is eroding, and that the price tag on any deal is shrinking.
GE is the parent company of CNBC.
The unit, which makes plastics for automotive parts, computer enclosures, compact disks, telecoms equipment and construction materials, faced margin pressure in 2006 as a result of the rising price of benzene, a key raw material.
The auction, run by Goldman Sachs, is unique in that the bank is prohibiting the four main bidders from teaming up with each other. Teaming up among buyout firms has been a common practice in the industry, and one that critics say reduces competition.
The four leading bidders for GE Plastics -- Apollo Management, Blackstone, Carlyle Group and Kohlberg Kravis Roberts & Co. -- have signed agreements promising not to team up with each other, according to two sources involved in the process.
But at least three of the four already have partners, according to sources close to the process: Carlyle is linking up with Texas Pacific Group, KKR is teaming up with Bain Capital, and Blackstone plans to partner with Koch. It was not clear if Apollo had a partner, the sources said.
GE and Koch declined to comment, as did the private equity firms.
News of the sale process, and the effort to prohibit the main bidders from teaming up, came shortly after reports that the U.S. Department of Justice had launched an investigation into whether buyout firms collude to drive down the price of deals.
With at least seven buyout firms already involved, Goldman's restriction on the bidding may not be as tight as it first appeared. Exclusive financial information is expected to be provided to the bidding teams at the end of this week.
When news spread in early January that GE Plastics was on the block, some analysts said GE could receive up to $10 billion for the unit.
But plastics companies are under pressure from rising raw material costs. "We caution that if GE Plastics' profitability continues to erode over the course of the year, the business could fetch a lower price than the $10 billion," Merrill Lynch analyst John Inch said in a Jan. 22 research note, adding that GE expects the plastics business to remain difficult in the first
GE Plastics recorded revenue of $5 billion for the first nine months of 2006, and profit of $560 million.
So far, Koch is the only corporation that has shown interest in bidding for the unit. Koch is the second-largest private company in the world, behind Cargill, according to Forbes, with $60 billion in revenues last year. Wichita, Kansas-based Koch owns a group of companies that trade and produce petroleum, asphalt, natural gas, chemicals, plastics and fibers, and chemical technology equipment. The company also has interests in ranching, securities and finance.
In 2004 Koch bought DuPont's textile fiber business in a $4.2 billion deal. In the months after the deal, Koch cut jobs at the business in a bid to trim costs and improve profitability. It also used its hefty presence in the petroleum industry to hold down raw-material costs.
Private equity firms like chemical assets as they provide a stable cash flow and in many cases opportunities for restructuring and efficiency improvements. Buyout firms buy and sell companies, borrowing most of the money to finance deals.