ATLANTA (Aug. 8, 2:20 p.m. ET) — Georgia Gulf Corp.'s merger with the commodity chemicals business of PPG Industries is expected to greatly improve Georgia Gulf's integration into materials needed to make PVC resin.
When the deal is completed later this year or in early 2013, Georgia Gulf will move from being a net buyer to a net seller of chlorine, company spokesman Alan Chapple said in an Aug. 7 phone interview.
“The integration advantage is huge,” he added. “One of our strategic goals has been to improve our chlorine integration.”
Atlanta-based Georgia Gulf and Pittsburgh-based PPG already share a chlorine-making joint venture in Lake Charles, La. Under terms of the deal - announced July 19 - a new public company will be formed, with PPG shareholders holding a 50.5 percent stake. The new firm will be renamed, but will remain in Atlanta. Georgia Gulf chief executive officer Paul Carrico will have the same role with the new company. The combined business is expected to have annual sales of about $5 billion and will employ 2,000.
Giving PPG shareholders a slight majority in the new firm through a Reverse Morris Trust transaction will create a substantial tax savings, sources said.
The deal includes a $900 million cash payment from Georgia Gulf to PPG, as well as the new firm taking on almost $200 million in debt and other interests and the transfer of $1 billion of Georgia Gulf stock. Those items combine to value the deal at about $2.1 billion.
That amount is “the right price for a commodity deal,” according to Dmitry Silversteyn, a market analyst with Longbow Research in Independence, Ohio. It represents a multiple of about 5.7 times the PPG unit's recent earnings.
PPG products included in the deal are PVC feedstocks ethylene dichloride and vinyl chloride monomer, as well as caustic soda. The deal covers four production sites in the U.S. and one in Canada. Officials have yet to determine if a PPG JV plant in Taiwan will be included in the deal.
In the first half of 2012, PPG's commodity chemicals business had sales of $846 million, down almost five percent from the same period in 2011. The unit's operating income was roughly flat at $206 million. The business represented 11 percent of first-half sales for PPG, ranking fourth among PPG's six operating units. In operating income, the business ranked third, with almost 18 percent of the company's total.
But it was clear the commodity chemicals business no longer fit into PPG's long-term plans.
Combining the business with Georgia Gulf “is consistent with our strategic direction of becoming more focused on being a paint and coatings company,” PPG spokesman Jeremy Neuhart said. In recent years, PPG also has sold off its automotive glass and fine chemicals businesses. The Georgia Gulf move “is a tremendous opportunity for both companies,” Neuhart added.
Silversteyn added that PPG hadn't invested in its commodity chemicals assets for several years and that the business was highly cyclical, leading to challenging results in the recession of 2008-09.
Georgia Gulf ranks as one of North America's largest PVC makers and is one of the region's largest PVC compounders as well. It's also a major player in PVC-based construction products.
In the first half of 2012, Georgia Gulf posted sales of just over $1.7 billion - up almost seven percent vs, the year-ago period. The firm's first-half profit skyrocketed more than 80 percent to almost $49 million.
At IHS Chemical in Houston, market analyst Steve Brien said that the deal “has good synergy, since Georgia Gulf wanted to be back-integrated into chlor-alkali.” He added that Georgia Gulf also could benefit from other finished chemical products made by PPG, but pointed out that the new firm still won't be back-integrated into ethylene feedstock.
The Georgia Gulf-PPG deal came less than three months after Westlake Chemical Corp. Of Houston - another major PVC maker - withdrew an unsolicited bid for Georgia Gulf that it first had made in January. Westlake's second and final offer for Georgia Gulf valued the firm at about $1.2 billion. Georgia Gulf officials rejected both deals, describing the final offer as “far from compelling.”
Spokesman with both Georgia Gulf and PPG said they had no information on the timing of the Georgia Gulf-PPG deal in relation to the Westlake offer.
Georgia Gulf officials have worked to help the company recover from its near-disastrous $1.6 billion acquisition of building products maker Royal Group Inc. In 2006. As recently as 2008, the firm posted a loss of more than $250 million. It's been profitable for the last three years and looks to do the same in 2012.
Georgia Gulf's per-share stock price already had been up because of positive results and the offer from Westlake, climbing from around $21 on Jan. 1 to just under $29 on July 18. The PPG deal was announced the next day, sending the price to almost $33 by the end of the day. It's continued to rise and was near $38 in early trading Aug. 7.