As expected earlier, but not as speculated ten days ago, Lanxess has clinched a deal for its synthetic rubber business with Saudi Aramco Overseas Company, a subsidiary of the Saudi Arabian oil giant. The two companies have agreed to form a 50:50 joint venture with annual sales of €3 billion and an enterprise value of €2.75 billion.

The jv – for which no name has been revealed – will be the world’s largest rubber producer. Managed by a holding based in the Netherlands, its CEO will be appointed by Lanxess, its CFO by Aramco Overseas Company. Lanxess CEO Matthias Zachert will serve as chairman of the board of directors, on which each partner will have equal representation. Lanxess will consolidate the jv’s financials.

To seal the agreement, the Saudi company will pay the German chemical producer around €1.2 billion in cash for its 50% stake, after deduction of debt and other unspecified financial liabilities. Following approval by antitrust authorities, the transaction is scheduled to close in the first quarter of 2016. After this, a five-year lock-up period will begin, during which the shareholder structure will remain unchanged.

CEO Matthias Zachert said Lanxess will pump around €400 million of the proceeds from the sale into the growth of its well-positioned and less cyclical segments Advanced Intermediates and Performance Chemicals. Another roughly €300 million has been earmarked for a further reduction of the company’s financial debt position and around €200 million is planned to be used for a share buyback program.

The joint venture will consist of the Lanxess business units Tire & Specialty Rubbers (TSR) and High Performance Elastomers (HPE), including 20 production facilities in nine countries with some 3,700 employees and additional support staff. The high-performance materials are used mainly in tires and in technical applications such as hoses, belts and seals but also in construction materials and by oil and gas companies.

Saudi Aramco will supply the jv with what Lanxess described as “competitive and reliable access” to strategic raw materials over the medium term. Once existing contracts expire, Zachert said the Saudi company would serve as a “power network” to secure “attractive procurement agreements.”

For Saudi Aramco, the deal with Lanxess offers a further opportunity to expand its business downstream into chemicals as it was already doing in the Satorp joint venture with French oil and petrochemicals player Total as well as in the Sadara jv with US chemical giant Dow.

Earlier this month, the news agency Reuters had speculated the German company was seeking a deal with Swiss-based petrochemical giant Ineos, which could have provided butadiene as a raw material for the rubber business. Previously, Lanxess had been seen as speaking to Russian petrochemical groups Nizhnekamskneftekhim and Sibur.

The new alliance will give the Lanxess rubber business “a very strong competitive position and the best possible future perspectives,” Zachert said. Together, he said, the stakeholders “will be in a position to produce synthetic rubber in an integrated value chain from the oil field to the end product, thus establishing one of the best positioned suppliers in the world market.

“In addition to creating a new revenue stream for Saudi Aramco,” Abdulrahman Al-Wuhaib, senior vice president Downstream at the Saudi oil giant, said, “the agreement will spur economic growth and diversification opportunities for the Kingdom of Saudi Arabia and the Middle East region in high-volume sectors, such as tire and auto-parts manufacturing, that are dependent on higher-margin, value-added chemicals products.”

In finalizing the rubber alliance, Lanxess is implementing the third stage of its three-phase realignment program. “We have established a completely new strategic starting point for our company in just over a year,” Zachert remarked, adding that administrative functions have been streamlined, with many production structures and processes made more efficient, and the new jv the company is “delivering on the most important phase of its realignment with the best partner possible and in a very short period of time.

“The resulting financial headroom will allow us to return to growth considerably sooner than expected,” the Lanxess chief predicted. In a conference call with analysts he said the new company will not be saddled with excessive debt and thus will be able to make acquisitions to support future growth.