Mega-merger mania hit the North American PVC industry June 25, as Geon Co. of Avon Lake, Ohio, and Occidental Chemical Corp. of Dallas announced a major joint venture and acquisition involving the firms' suspension resin and compounding businesses.
The new venture, to be based in Dallas, will have annual capacity of 4.2 billion pounds of PVC, surpassing Houston's Shintech Inc. as North America's largest PVC maker. It also will be able to produce 4.8 billion pounds of vinyl chloride monomer and 2 billion pounds of chlorine.
OxyChem will own 76 percent of the venture, with the split based on what each company contributed to the new firm, officials said.
In addition, Geon will acquire OxyChem's vinyl compound and film businesses in Burlington, N.J. OxyChem's rigid vinyl compounding business will be relocated to Pasadena, Texas. Total sales for OxyChem's compounding and film businesses are about $200 million.
Here's what the two sides bring to the joint venture:
OxyChem contributes a PVC resin plant in Pasadena, a VCM plant in Deer Park, Texas; 50 percent interest in a VCM plant in Ingleside, Texas; two chlor-alkali plants and two cogeneration facilities in the Houston area. OxyChem also will pay off $110 million in Geon debt.
Geon brings PVC resin plants in Deer Park; Louisville, Ky.; Pedricktown, N.J.; Niagara Falls, Ontario; and Scotford, Alberta; and a VCM plant in LaPorte, Texas.
Geon will enter into a long-term resin purchase agreement with the new company. Both Geon and OxyChem will enter into long-term VCM supply agreements with the new company for their individual dispersion resin businesses.
Financially, the venture expects to reduce costs by $80 million annually. Geon also will receive $110 million in cash, while the new firm will take over $185 million in lease obligations connected to expansion and improvements of Geon's LaPorte plant.
``With its strong integration and the synergies we expect to achieve, the proposed resin joint venture will be economically competitive with the best in the world,'' William Patient, Geon chairman and chief executive officer, said in a news release.
In a telephone interview, J. Roger Hirl, OxyChem's president and CEO, said the deal ``is playing to each company's strengths.''
``This agreement will be to the benefit of the overall industry,'' Hirl said. ``Customers will benefit from strong competition and reliability of supply.''
The move comes at a time when PVC prices and profitability are both hurting from industry overcapacity and decreased demand from troubled Asian markets. Per-pound prices in North America have dropped an average of 3 cents this year, after slumping badly in the last half of 1997.
But Hirl said these factors had no effect on the OxyChem/Geon deal.
``The strong players are the ones who can survive the cycle,'' he said. ``And the timing is coincidental with the malaise in the Far East.''
In compounding, Geon will acquire OxyChem's Burlington plant, an addition that will drive Geon's share of the North American PVC compounding market to close to 40 percent.
``We see many opportunities to apply our skills in a wider array of markets related to our core strengths,'' said Thomas Waltermire, Geon president and chief operating officer. ``Our first goal is to double our size in the next few years.''
The companies also will form a separate powder compounding joint venture, 90 percent owned by Geon, involving Geon plants in Conroe, Texas, and Plaquemine, La., and an OxyChem plant under construction in Pasadena.
Dispersion PVC plants operated by Geon in Henry, Ill., and Pedricktown, N.J., and by OxyChem in Pottstown, Pa., will be unaffected by any of the transactions.
Hirl said officials have discussed the joint venture since OxyChem merged its ethylene and propylene feedstock businesses with Equistar Chemicals earlier this year. Talks with Geon began in earnest about two and a half months ago.
``Ten years ago, this [venture] would have been anathema in the industry,'' Hirl said. ``But now you can work out something like this together, without suffering the usual pains of mergers and acquisitions.''
``We'll probably see more of these, it's just a matter of who and what and where,'' he said.
The far-flung arrangement will provide Geon with OxyChem's caustic soda, chlorine and ethylene production, and will allow OxyChem to funnel resin into Geon's compounding sites, according to Pat Duke, a consultant with Houston's DeWitt & Co.
``It's a good fit,'' Duke said. The new company ``could really take a leadership position in the PVC industry.''
Duke added that the deal also raises the question of what action other PVC makers will take, including Condea Vista Co., Borden Chemicals & Plastics, and Georgia Gulf Corp., which don't have similar supply agreements in place.
Dennis Cocco, Geon's vice president of corporate and investor affairs, said in a telephone interview that Geon had taken several steps to lower its global cost position, but that those steps had failed to achieve the necessary results — and that prompted Geon to pursue this arrangement.
``In a lot of different ways, this is the best thing we could have possibly done to be competitive in the marketplace,'' Cocco said.
Geon has been building its compounding and service units, largely through acquisitions. Recent deals include the purchase of Synergistics Industries Ltd., Plast-O-Meric Inc., and the Wilflex Ink Division of Flexible Products Co.
The companies must still reach a final agreement, which will be subject to board, stockholder and regulatory approvals. Geon and OxyChem expect to complete the deal late this year.