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 comes to mind. It is trying to buy Wavin, Europe’s largest producer of plastic pipe for about $650 million. Why not drop that and string together a Georgia Gulf bid? Braskem also comes to mind. It is the big wheel in Brazilian chloro-vinyls and has been acquisitive in recent years in the U.S., buying both Dow’s and Sunoco’s polypropylene business.

8) There are echoes of Air Products/Airgas in Westlake’s bid. Both Airgas and Georgia Gulf called their unsolicited bids opportunist attempts to take advantage of share prices that were temporarily in the cellar. Both Air Products and Westlake responded that with their offers, shareholders of the target companies wouldn’t have to wait for fortunes to turn around to see a payday. Nearly a year ago, Air Products was forced to drop its $70 bid. Now Airgas is trading at above $80 per share.

9) One has to concede the first riposte to Georgia Gulf. Shares were worth more than $40 last year before the grumblings over European debt last summer. Georgia Gulf had been on the upswing in recent months. Westlake seems to be acting now before its opportunity slips away.

Author: Alex Tullo

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