Georgia Gulf Corp.'s pending purchase of Royal Group Technologies Ltd. has drawn praise from some, but has received puzzled looks from others in the plastics market.
The $1.6 billion deal is a major move into downstream integration for Atlanta-based Georgia Gulf, North America's fourth-largest PVC maker. Woodbridge, Ontario-based Royal is North America's largest maker of vinyl building products.
``The deal makes sense,'' said an executive with a Midwest-based PVC pipe maker. ``Georgia Gulf had to show something to its shareholders, and where else were they going to invest?
``This allows them to control the place they sell their resin to, which means they can expand. It's risky, but it was a good move in order for [Georgia Gulf] to survive.''
As for Royal, the executive said the firm ``has had some real big winners and real big losers.''
``They grew pretty well for a period of time, but they also got hurt in some areas like PVC houses, which never really took off,'' he said.
Georgia Gulf investors have not been impressed. The resin maker's per-share stock price was around $30.50 when the deal was announced June 9, but it had plunged 25 percent, to close June 19 at $22.65. By comparison, Royal's per-share price began June 9 around $8, then shot above US$11.50 and remained above US$11 in late trading June 19.
Stock analyst Kevin McCarthy, who covers Georgia Gulf, raised some concerns in a June 12 investment note from Banc of America Securities in New York.
McCarthy said the deal ``gives us pause,'' since the price - at a 45 percent equity premium and a multiple of almost 8 times 2007 pro forma pretax profit - appears high. He also pointed out that the building and construction markets are near their peak and that Royal's legal problems are a risk.
Canadian authorities are looking at possible fraud in financial activities of Royal and company founder Vic De Zen, who resigned from the company, former Chief Executive Officer Douglas Dunsmuir, former Chief Financial Officers Gary Brown and Ronald Goegan and two founding directors.
Authorities also are examining transactions between Royal Group and a luxury resort in St. Kitts majority-owned by De Zen, and the possibility that homes in Canada were built by Royal Group as personal favors.
A longtime PVC pipe veteran based in Texas also questioned the deal.
``I don't know what [Georgia Gulf's] motivation was,'' he said. ``The experience [of PVC makers] in downstream integration has been mixed.''
In North America, two PVC makers are forward-integrated into pipe production. Taiwan's Formosa Plastics Corp. USA operates the J-M Manufacturing Co. Inc. pipe unit, while Houston-based Westlake Chemical Corp. owns pipe maker North American Pipe Corp.
J-M ranks second and Napco ranks sixth in annual sales in the North American pipe, profile and tubing market, according to Plastics News industry research.
Government data also back up the belief that the U.S. housing market is cooling. Sales of new single-family homes were down 11 percent in the first four months of 2006, according to the Commerce Department. By comparison, total U.S. housing starts - including multifamily - grew almost 6 percent in both 2004 and 2005 and more than 8 percent in 2003. The category has shown year-on-year growth in eight of the past 10 years.
After the deal closes, Georgia Gulf will have to decide what to do with the assets it is buying, as well as some of its existing businesses. Banc of America's McCarthy speculated that Georgia Gulf may sell its aromatics businesses, which accounted for about 30 percent of the firm's $2.3 billion sales total in 2005.
Several market watchers added that Royal has excess capacity in a few product areas. The firm already had announced plans to sell US$300 million in noncore businesses and 40 percent of its manufacturing and warehouse space.
Royal's Canada-based resin production sites - which supplied about half of its PVC requirements - also may be shuttered in favor of newer capacity that Georgia Gulf is adding in Louisiana, contacts said. Georgia Gulf, in turn, may want to close some older, less-efficient production capacity, sources added.
In a June 9 conference call, Georgia Gulf Chairman, President and Chief Executive Officer Ed Schmitt said only that ``there will be further consolidation of some [Royal] production facilities.''
Georgia Gulf spokeswoman Angie Tickle declined to comment June 15 on a possible sale of the firm's aromatics business. Georgia Gulf ``is confident in our plants and manufacturing facilities,'' she said.
Tickle also declined to comment on other aspects of the proposed acquisition, saying Georgia Gulf ``has to close out the deal first.''
Georgia Gulf supplied PVC to Royal in the past but does not do so at present, according to Tickle. Royal shareholders are expected to vote on the deal in July. If approved, the transaction could close as early as September.
Officials with Royal could not be reached for comment.
At current sales levels, Royal will account for about 40 percent of Georgia Gulf sales after the deal closes. If Royal finishes its noncore sale and Georgia Gulf sells its aromatics unit, the remaining company will have annual sales of about $3 billion, with about 40 percent of that total again coming from Royal units.
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.