Royal Group Technologies Ltd. has signed a letter of intent to buy the U.S. operations of a European wood-plastic composite maker.
It could be a sign that Woodbridge, Ontario-based Royal Group wants to diversify its siding portfolio, as the technology developed by Tech-Wood International BV of Rotterdam, the Netherlands, is used predominantly in siding and exterior trim applications.
Tech-Wood's U.S. operations are based in Greenwood, S.C. Royal is buying a 30-acre parcel there, where the company plans to expand a 100,000-square-foot plant and construct an additional, 30,000-square-foot building. Tech-Wood was planning to invest $150 million in the site during the next five years.
The facility is slated to begin operating this year, with plans to be in full production by the end of the first quarter of 2007. Royal officials declined to say how many workers they plan to employ in Greenwood.
Despite vinyl siding's status as the dominant exterior cladding material in North America, it is a product that yields thin profit margins on high-volume brands.
``Royal had to do something to expand their composite materials platform for growth,'' said John Pruett, a principal with Exton, Pa.-based Principia Partners, an advisory firm that tracks the wood-plastic composite industry.
``Vinyl siding has been growing throughout the '80s and '90s, and incrementally for the first half of this decade, but the forecast is not pretty for the next few years,'' Pruett said in a May 2 telephone interview.
Fiber cement has emerged as a fast-rising threat to vinyl siding manufacturers. Valley Forge, Pa.-based CertainTeed Corp., one of the industry's largest producers of vinyl siding, is investing about $70 million in a new fiber cement plant in Indiana.
Pittsburgh-based Alcoa Inc. announced last month the planned sale of its home exteriors business, including its vinyl siding division, to focus on the aluminum industry.
``Alcoa and CertainTeed lead the vinyl siding market,'' Pruett said. ``The others are kind of struggling to stay relevant, unless they've got something unique, such as niche products like foam-backed siding'' or injection molded polypropylene.
Tech-Wood products are made of a mix of about 30 percent PP and 70 percent long pine fibers, a portion of which is recycled.
The composite also is used in fence, deck and railing applications, an area in which Royal officials want the company to grow outside of vinyl.
``Tech-Wood represents an important continuation of Royal Group's strategy to develop composite building materials and will provide Royal Group with the opportunity to further penetrate the exterior decking, railing and fencing markets,'' said Royal Chief Executive Officer Larry Blanford in a news release.
Royal launched its first wood-plastic composite decking line, Harmony Select, last year.
An economic development official in Greenwood said the Royal acquisition should prove to be a good thing for the project, as Royal has the financial resources to withstand heavy demand.
Jeff Fowler, president and CEO of Greenwood Partnership Alliance, said he believes the Tech-Wood product is going to take off.
``The guys involved before were going to put a lot of measures in place to control growth,'' Fowler said. ``The thing that will really kill you is not not being able to sell, but not being able to meet demand. If you've got a company [that's] not strong like a Royal, you can get undercapitalized very quickly.''
The planned purchase of the U.S. Tech-Wood operations comes as Royal is undertaking significant change. Royal is in the midst of a plan to divest about $300 million in noncore businesses and 40 percent of its manufacturing and warehouse space in 2006.
Also, Royal itself could have a new owner soon. The company announced about a year ago that it would consider bids. Last week, Royal announced that ``due diligence with a few select prospective bidders will continue for a short period,'' following the May 1 release of the company's 2005 audited financial statements.
``As of today, there are a limited number of potential bidders remaining,'' Royal spokesman Mark Badger said May 4 by telephone. ``No firm offer has been received.''