HOUSTON (Updated Jan. 20, 11:20 a.m. ET) — Georgia Gulf Corp. has rejected Westlake Chemical Corp.'s $30 per-share acquisition offer — worth just over $1 billion — after determining that the proposal was “financially inadequate and not in the best interest of Georgia Gulf shareholders.”
GeorgiaGulf's board of directors also has adopted a stockholder rights plan — commonly known as a “poison pill” — to discourage Westlake from increasing its stake in the firm. The plan would allow stockholders to buy shares at a reduced price if any person or group acquires more than 10 percent of GeorgiaGulf shares. Westlake currently owns just under 5 percent of those shares.
Westlake officials responded to GeorgiaGulf's rejection in a Jan. 17 news release, saying that the response “demonstrates why Westlake had no choice other than to take our compelling proposal directly to GeorgiaGulf's shareholders.”
“We urge [GeorgiaGulf] shareholders to make it clear to GeorgiaGulf's board that they should immediately begin negotiations with us about getting a transaction done,” Westlake officials added.
The proposed deal would create a major North American PVC presence as well as a business with annual pipe, profile and tubing sales of almost $1.5 billion. But in a Jan. 16 news release, the board of directors at Atlanta-based GeorgiaGulf said that Westlake's offer “takes advantage of a dislocation in public market valuations in order to deprive GeorgiaGulf stockholders of the intrinsic value in their investment.”
The GeorgiaGulf board added in the release that the offer “undervalues the company by failing to acknowledge GeorgiaGulf's significant ability to leverage improving global PVC demand and its access to comparatively low-cost U.S. shale gas.”
When Houston-based Westlake went public with its offer Jan. 13, officials said the $30 proposal was a 51 percent premium to GeorgiaGulf's 30-day trading average. In the Jan. 16 release, GeorgiaGulf officials said the amount was only a 23 percent premium to its Jan. 12 share price.
A report from New York financial firm Dahlman Rose & Co. LLC — cited in a Jan. 17 Bloomberg News article — said that Georgia Gulf is worth $45-$50 per share, and that Westlake's offer “doesn't reflect the improved earnings that would result from a faster-growing company.”
Officials with Houston-based Westlake said that they had first contacted GeorgiaGulf officials in September, but had received little reply, and as a result were taking their offer public. The two sides also met face-to-face in Atlanta on Dec. 22.
“We believe that our proposal represents a unique opportunity to deliver significant and immediate value to GeorgiaGulf stockholders,” Westlake President and CEO Albert Chao said in the release. “As such, we are surprised and disappointed that GeorgiaGulf's management has been unwilling to engage in substantive discussions with us.”
In the first nine months of 2011, GeorgiaGulf's sales grew 20 percent to more than $2.5 billion, and its profit more than doubled to $61 million. But in 2010, the firm's profit had fallen almost 70 percent, even as sales grew more than 40 percent to $2.8 billion. GeorgiaGulf employs 3,600 at 14 sites in the U.S. and Canada.
Westlake employs about 2,000 at 16 global sites — 14 in the U.S., one in Canada and one in China. The firm posted sales of $3.2 billion in 2010 and sales of almost $2.8 billion in the first nine months of 2011. Westlake's nine-month profit was up 40 percent from the year-ago period.
If the deal goes through, it could have a big impact on the North American plastics market. Both firms rank among the region's largest PVC makers. A combined Westlake-Georgia Gulf PVC business would ranks as the second-largest PVC maker in the U.S./Canada region, with around 4.3 billion pounds of annual capacity and a market share of about 26 percent. The combined business would trail only Shintech Inc. in U.S./Canada market share.
Such a move also would reduce the number of North American PVC makers to four. Domestic PVC demand has suffered in recent years after the collapse of the residential housing market. An increased emphasis on exports has helped to keep the industry afloat.
GeorgiaGulf also is a major PVC compounder, while Westlake ranks among the region's largest makers of low density polyethylene. Both firms also make several other specialty chemical products, including plastic feedstocks.
Both firms are very active in downstream plastic products as well. GeorgiaGulf's Royal Group unit makes PVC pipe, siding and related products and has annual sales estimated at $895 million. Westlake's North American Pipe unit has annual sales of $545 million.
Royal Group placed second in Plastics News' most recent ranking of North American pipe, profile and tubing makers, while North American Pipe came in sixth in the same ranking.
“From a strategic perspective, this looks like it would be a good fit for Westlake,” industry analyst Phil Karig said in an email. “Unlike GeorgiaGulf, Westlake is backward-integrated into ethylene, which provides it a long-term cost advantage for manufacturing [feedstocks] ethylene dichloride and vinyl chloride monomer vs. GeorgiaGulf.
“Even better, from Westlake's perspective, they would also be getting additional Georgia Gulf assets, including Georgia Gulf's Royal Building Products Division, which would allow Westlake to integrate further downstream into PVC pipe and other building related products,” added Karig, who is president of Mathelin Bay Associates LLC consulting firm in St. Louis.
Industry analyst Mark Kallman said in an email that his “initial read” of Westlake's GeorgiaGulf bid is that Westlake “sees a bargain in a weakened GeorgiaGulf to grow to No. 2 in the domestic [PVC] market.”
“That takes the market from five large producers down to four, consolidating and strengthening market position,” said Kallman, who is with Resin Technology Inc. in Fort Worth, Texas. “Not to mention with the future pretty rosy in terms of low-cost natural gas-based feedstocks, PVC is a pretty good investment with the support of a strong export market.”
A Westlake takeover of Georgia Gulf also “could draw regulatory scrutiny” by reducing the domestic PVC market to four major players, Karig said, adding that the “big question” for PVC consumers is whether a Georgia Gulf purchase would not only concentrate PVC capacity, but if it would also lead to PVC capacity shutdowns that could substantially tighten the PVC market.
Any Westlake-GeorgiaGulf combination might do more to help their downstream markets in pipe and other products, more so than their domestic sales health, according to Joel Lindahl, an industry analyst with IHS Chemical in Houston.
“We don't see a big change in domestic PVC demand this year or next year,” Lindahl said. “We'll see some growth from the low point, but exports should continue to play a big role.”
A successful deal also would help GeorgiaGulf become more back-integrated into raw materials needed to make PVC, he added.
News of the offer also had a major impact on the per-share stock prices of both companies. GeorgiaGulf's per-share stock price closed near $33 on Jan. 13 — up 34 percent from the day before — and was at $34.40 in late trading Jan. 19. For Westlake, its per-share price jumped 5 percent to almost $54 on Jan. 13. It was trading at $55.40 late Jan. 19.
News releases issued by both firms also indicate that relations had become frayed in recent months. In their release, GeorgiaGulf officials took Westlake to task for declining to sign a confidentiality agreement.
“The idea that we would have these sorts of highly sensitive discussions with a substantial direct competitor without the protection of a standard confidentiality agreement is neither customary nor acceptable to the GeorgiaGulf board,” officials said. “Yet [Westlake] refused to sign the agreement and were unable or unwilling to provide a coherent reason why.”
GeorgiaGulf officials added that the statements in Westlake's Jan. 13 letter that GeorgiaGulf “was unwilling to provide information or enter into substantive discussion with [Westlake] are simply not true.”
Westlake's Jan. 13 news release included a letter from Westlake CEO Chao to GeorgiaGulf's board chairman, Mark Noetzel. In the letter, Chao refers to GeorgiaGulf wanting “a restrictive standstill agreement without any commitment on its part to respond to requests for information or to negotiate in good faith.”
GeorgiaGulf spokesman Alan Chapple said by phone Jan. 19 that his firm “is aware of [Westlake's] offer and will respond in due course.” He declined further comment on the offer.
Westlake officials declined further comment as well, with a company spokesperson saying only that “the ball is in [GeorgiaGulf's] court.”