Atlanta-based resin maker Georgia Gulf Corp. has signed a definitive agreement to buy vinyl building products giant Royal Group Technologies Ltd. for $1.6 billion.
Officials are shooting for a September closing.
The announcement comes as Woodbridge, Ontario-based Royal Group undergoes sweeping changes, including the planned divestiture this year of about $300 million in noncore business and 40 percent of its manufacturing and warehouse space.
Ed Schmitt, Georgia Gulf's chairman, president and chief executive officer, told analysts in a June 9 conference call to expect more changes.
``There will be further consolidation of some production facilities,'' Schmitt said.
Georgia Gulf makes chlorovinyls and aromatics, including PVC resins and compounds for the building and construction sector, and other markets.
Some Georgia Gulf analysts questioned the prudence of the purchase, pointing to the home building slowdown, a sluggish vinyl siding market and Royal's recent financial performance.
Georgia Gulf officials were quick to defend the purchase, touting Royal as the No. 1 maker of polymer-based building products.
Schmitt dismissed concerns about the housing market, saying vinyl is the dominant replacement material in home improvement.
``You have to consider the houses that already exist. If you look at Royal's products, they're all in sustainable markets,'' he said. ``We believe the housing market is, long term, a very sustainable place to be.
``In the end, this is a natural hedge for Georgia Gulf's chemicals business.''
Steve Brien, a PVC market analyst with Chemical Market Associates Inc. in Houston, said the deal is ``a good move for both companies.''
``Royal has an exceptional reputation in downstream finished products,'' Brien said. ``Georgia Gulf hasn't been integrated downstream, but the world they're competing against has been.
``If you look at [Georgia Gulf's] whole portfolio, this would give them the ability to capture earnings up and down the chain in a down market. This [deal] gives them the option of a larger and more secure outlet for their resin.''
In a larger sense, Georgia Gulf ``had to do something'' to compete with other PVC makers, said Pat Duke, a PVC market analyst with DeWitt & Co. in Houston.
``This is a good move in that it allows [Georgia Gulf] to maximize the use of their chlorine stream and gives them a group that services the finished goods market,'' Duke said. ``It also may allow them to shutter older [PVC] capacity and improve their bottom line.''
Duke added that the integrated approach of Asian-owned PVC firms such as Shintech and Formosa now seems to be dominant in North America.
``The Asian approach emphasizes market share as opposed to price,'' he said. ``As long as you can maintain your market share, it doesn't matter if you're competing with your customer, as long as your customer feels that they're being kept competitive.''
Georgia Gulf posted sales of $568 million in the first quarter of 2006 - a drop of 12 percent from the same period a year ago. Profit tumbled 12 percent to $59 million.
In spite of the quarterly downturn, stock analyst Kevin McCarthy with Banc of America Securities LLC in New York raised his 12-month target price for Georgia Gulf to $32 per share.
In a May 1 investment note, McCarthy said Georgia Gulf's quarterly earnings before interest and taxes were the second-highest in its history. But he added that his firm's longer-term view on Georgia Gulf is ``more cautious.''
``We see rising capacity at [Georgia Gulf] and competitors Formosa and Shintech adding 6 percent to North American [PVC] supply for 2008, while rising interest rates bode ill for PVC-based durables,'' McCarthy said.
The total transaction is valued at C$1.7 billion (US$1.6 billion), which includes US$11.82 per share for Royal stock, plus assuming about C$491 million in debt.
After the June 9 announcement, Georgia Gulf's per-share stock price dropped 13 percent to about $26.50 in early trading.
On the flip side, Royal investors' shares soared 40 percent in early trading on the Toronto Stock Exchange. Royal has annual sales of about US$1.5 billion.