Mitsubishi Chemical Holdings, is in talks to buy smaller rival Mitsubishi Rayon for up to $2.1 billion, the Nikkei business daily reported, in a move that would help consolidate Japan's overcrowded chemicals sector.

A spokesman for Mitsubishi Chemical, the country's largest chemicals firm, said he wouldn't deny that Mitsubishi Rayon was on a list of businesses it was considering for purchase, but declined to comment further.

A deal would not likely change Mitsubshi Chemical's global ranking of No. 14 in terms of chemical sales, but it would add key specialized materials to its product lineup to help it compete with larger rivals such as BASF.

Mitsubishi Chemical shares rose 4.7 percent, while shares in Mitsubishi Rayon, the world's No. 1 maker of materials used for acrylic resin, jumped by a fifth to a one-year high in its most active day of trade in at least 24 years.

If the report is true, it is positive and a big surprise, Nomura analyst Shuichi Nishimura wrote in a note.

It would be industry consolidation, which we have been saying is necessary for the Japanese chemicals sector, he said.

The deal, if agreed to at the top of the estimated price range, would be the fifth largest by a Japanese company this year, Thomson Reuters data showed.

Global chemicals companies such as global leader BASF are trying to focus on specialized compounds that command premium prices, dropping businesses faced with competition from low-cost countries.

Mitsubishi Chemical has been downsizing its petrochemical operations, which have been losing out to Middle Eastern and Chinese rivals. Instead it wants to build up its offering of value-added materials to catch up with BASF, Dow Chemical and other major players.

The deal would give them a chance to focus on high-end, high-performance resins and distance themselves from fierce price competition in basic petrochemical products, said Nobuhito Owaki, analyst at J.P.Morgan Securities.

Both of them make LCD panel components, but with little overlap in actual products, and both firms offer carbon fiber, which has long-term growth potential, he said.

Carbon fiber, a light-weight high-tech material known for its strength and heat-resistance, is used in products such as cars and planes.

Mitsubishi Chemical has said previously that it plans to spend more than 250 billion yen on acquisitions.

The two companies are likely to agree on a deal as early as this autumn and plan to complete the deal in spring next year, the Nikkei said.

TENDER OFFER

A tender offer is expected to be worth 150-200 billion yen ($1.5 billion-$2.1 billion), the paper said. Mitsubishi Rayon has a market capitalization of $1.7 billion.

The combined entity would have annual revenue of $33.9 billion, still less than half that of BASF, which had revenue of 62.3 billion euros ($88.5 billion) in 2008.

The global chemicals industry has been undergoing consolidation as major players seek to add specialized materials to their lineup, including Dow Chemical's more than $15 billion acquisition of Rohm and Haas.

Credit Suisse analyst Masami Sawato said in a note that the acquisition of Mitsubishi Rayon would bring its acrylic business and polyacrylonitrile-based carbon fiber products to Mitsubishi Chemical.

Separately, Mitsubishi Rayon agreed with Saudi Basic Industries Corp (SABIC) to set up a joint venture with an estimated cost of $1 billion to produce MMA monomers, the Saudi company announced on Monday.

Mitsubishi Rayon recently bought unlisted British chemical firm Lucite for $1.6 billion. Lucite is the world's top maker of methyl methacrylate (MMA) monomers, used in the production of acrylic resins needed for products ranging from liquid crystal displays and car lights to aquarium tanks.

Mitsubishi Chemical and Mitsubishi Rayon do not have a capital tie now, but were part of the same company before it was split in 1950.

($1=97.64 yen, 0.7043 euros)

(Additional reporting by Kiyoshi Takenaka, Mayumi Negishi; Editing by Edwina Gibbs, Hugh Lawson and Valerie Lee)

Japan Manufacturing