Georgia Gulf To Westlake: Not So Fast!
Jan20

Georgia Gulf To Westlake: Not So Fast!

You may have heard that Georgia Gulf has rebuffed a $30-per-share takeover bid from Westlake. Here are a few points: 1) By my calculations, the bid is worth just over $1 billion, or close to $1.7 billion, including Georgia Gulf’s long term debt. Georgia Gulf’s expectations for EBITDA (earnings before interest, taxes, depreciation, and amortization) for 2011 are between $245 million and $255 million. This makes the offer seem a little cheap. However, Georgia Gulf’s book value (equity less intangibles and goodwill) is about $243 million. 2) Georgia Gulf has been through heck and back. It bought building products maker Royal Group technologies for $1.6 billion in 2006. Congratulations if you recognize that this was the worst possible time for a company to increase its exposure to the housing market. The downturn didn’t bankrupt Georgia Gulf, but it came close. The company almost got delisted from NYSE when its market cap slipped under $75 million. It needed time from creditors for payments due. Moreover, a debt for equity swap amounted to a quasi-bankruptcy: shareholders were diluted, though not completely wiped out. 3) Strategically, this is a no-brainer for Westlake. Both are integrated chloro-vinyl companies. Westlake is integrated back into ethylene; Georgia Gulf isn’t. Both make fabricated products, with Westlake’s business oriented towards pipe and Georgia Gulf leaning towards window and door profiles. Westlake also makes polyethylene. Georgia Gulf has a cumene/phenol business. 4) Expect more to come. I would have to think that Westlake will follow with a tender offer. And given that the stock is trading at above $30 per share, I would expect to see Westlake sweeten the deal somewhat. I’m not terribly sure if the bid makes it into the courts or to a proxy fight. 5) Georgia Gulf is preparing a defense. Westlake already owns about 4.8% of Georgia Gulf. A poison pill, in the form of a rights offering to Georgia Gulf shareholders, will prevent Westlake from owning more than 10%. 6) Georgia Gulf had a staggered board until 2010. A staggered board means that not all of the directors are up for reelection every year. Now, Georgia Gulf directors are up for election when their term ends. By my reckoning, Georgia Gulf has five of its eight directors up for reelection later this year. Three will serve until 2013. This might present an opportunity for Westlake to stack the board, depending on the nomination process. 7) I wouldn’t be surprised to see competing bidders. The last big takeover drama in the industry was Air Products’ run at Airgas. There were few potential suitors for Airgas. There may be more for Georgia Gulf. Mexichem...

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Nexant Releases Polyolefins Forecast
May05

Nexant Releases Polyolefins Forecast

The chemical consultancy Nexant has released its market forecast for polyolefins. A few main points: Demand for polyolefins—polypropylene and various kinds of polyethylene—decreased only 0.14% last year despite a 2.1% decline in the global GDP. Nexant estimates polyolefins demand last year was 111 million metric tons. Nexant forcasts linear low-density polyethylene will grow at a 6.2% rate through 2015 while polypropylene and high-density polyethylene consumption increases at 5.7% and 5.5%, respectively. One neat thing about Nexant's forecast that you can see from the graph is that there is a lull in demand growth towards the end of the decade. Nexant must have an economic downturn in its model. Most forecasts that you see around the chemical industry don't seem to build in future downturns and thus forecast growth as as straight trendline. Working in a slowdown, like Nexant does, is more realistic, given that recessions occur every eight to ten years. 7 million tons of capacity came onstream in 2009. Nexant expects 9 million tons of polyethylene and 6 million tons of polypropylene capacity will come online in 2010. Most of the new capacity will start up in the Middle East and Asia. The onslaught of new capacity will reduce operating rates for existing polyethylene...

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