Saudi Arabia's Sahara Petrochemical and Saudi International Petrochemical Co (Sipchem) hope to complete a share-swap merger in the first half of 2014 that would create a firm valued around $5 billion.
The duo said in bourse filings late on Wednesday they had signed a memorandum of understanding relating to the merger and that due diligence had begun, although they cautioned that this was not an announcement of an intention to make an offer and that talks were still non-binding.
Talks about a possible merger have been ongoing since June.
Mergers between two listed Saudi entities are rare: consolidation in the Gulf is often scuppered by major shareholders who are unwilling to cede control of businesses except for very high price tags.
However, both firms have The Zamil Holding Co Group, one of the kingdom's most prominent family businesses, as a significant shareholder so this could help the process.
Should the merger happen, Sahara would become a subsidiary of Sipchem, with the latter offering 0.685 new shares in exchange for one Sahara share, Sahara said in its filing, equivalent to 300.6 million new Sipchem shares.
At current market price, Sipchem is valued at $2.8 billion, while Sahara is worth $2.19 billion, according to Thomson Reuters data.
The merger would "enhance the company's leading position in the local and international petrochemical industry" as well as offering significant cost savings and providing a stronger platform for long-term growth, the statements said.
HSBC Saudi Arabia is advising Sipchem - confirming what banking sources had told Reuters in June - and Morgan Stanley Saudi Arabia is assisting Sahara, the statements said.
The local operations of Allen & Overy and Clifford Chance are legal advisers to Sipchem and Sahara respectively.
Zamil, which has interests in petrochemicals, steel, housing, construction and other industrial sectors, owns 7.9 percent of Sahara and 9.6 percent of Sipchem. The government pension fund also has holdings of more than 5 percent in both companies.
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