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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Whoa! That’s A Lot Of Ethane

A new report from BENTEK Energy and Turner, Mason & Co. says that because of shale, we should expect a 40% increase in natural gas liquids production in five years. The increase amounts to 950,000 barrels per day of new natural gas liquids by 2016. That is an extraordinary amount of new feedstocks for the chemical industry. I ran my own estimates of how much ethylene production all these NGLs can support. I assumed 75% ethane content in the NGLs. I came up with 11 million metric tons of ethylene per year. These NGLs would also yield about 3.7 million metric tons of propylene (assuming propane from the NGLs is dehydrogenated) and other stuff. If the report, and the Chemical Notebook’s estimates, are correct, or nearly correct, then all the announcements we’ve been hearing about new ethylene capacity aren't nearly tapping out shale’s potential for petrochemicals. John Stekla, CMAI’s director of ethylene, gave a recent presentation where he forecast about 6 million metric tons of new ethylene capacity by 2016. (see slide 29). If not feedstocks, there is a factor that would limit the amount of new ethylene capacity that can be built. That is markets. Can the world really swallow more than 11 million metric tons of polyethylene, vinyl chloride monomer, ethylene oxide, and other derivatives from the U.S.? The world ethylene market today, Stekla points out, is around 120 million metric tons. My own thoughts are that we probably will see more capacity announcements in the U.S., though not to the tune of another 5 million metric...

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Notes On Dow’s Investor Day

Yesterday Dow held its annual investor day. The main theme was that the pieces were in place for strong earnings growth. In an interview after his presentation, CEO Andrew Liveris complained that the company is still being pigeonholed unfairly as a commodity chemical company by Wall Street. The post-recession peak for Dow shares, early this past May, was more than $42. Now they are trading in the low 20s. I am writing a feature story on the event for C&EN. I do have a couple of observations that I wanted to share on the blog right away. Dow is walking back plans to divest high-density polyethylene. About a year ago, Liveris floated a trial balloon about the sale of HDPE. The distinction the company has been making has been between its “specialty” solution process polyolefins and “commodity” Unipol-based, gas-phase polyolefins. Liveris told me yesterday that Dow now plans to convert gas-phase plants into solution-based plants at “integrated” facilities. He specifically mentioned Alberta. I would gather that this means swapping out the reactors and leaving the rest of the plant infrastructure in place. Polyolefins licensing is a keeper for Dow. Polypropylene licensing was left out of the sale of the polypropylene business to Braskem. Dow really intends to keep this. The same goes for its stake in Univation, which licenses Unipol polyethylene. Howard Ungerleider, who leads the Performance Plastics division for Dow, told me the polypropylene licensing unit is a pretty big earner for Dow and has been gaining market share. Dow AgroSciences is a keeper, too. When Dow was going through a crisis in early 2009 related to its purchase of Rohm and Haas, Liveris indicated that he might sell this unit. I asked him if the company is still on the fence about this. He said that the company is “Not on the fence and fully on the farm.” Though the unit is small compared to competitors like Monsanto, Liveris said that the unit is “punching above its weight.” Dow’s acquisition strategy will be modest. The company is steadily digesting the debt related to Rohm and Haas. One might think that the company would be planning acquisitions again. Not so. Liveris says the company is only considering smaller acquisitions to round out his existing portfolio. He mentioned IBM, where Liveris incidentally is a director, as a model. Andrew Liveris is a Michigan Wolverine fan. I talked football with him while arranging my stationary on the conference table. He is very excited about the 5-0 start. I am too. I warned him, as a Michigan alum, not to put too much faith in a good Michigan start. (I was...

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Nova Chemicals Gives More Details On Nova 2020

Nova had its second quarter earnings conference call yesterday. I was interested in whether the company would give more details about its plans to build two new polyethylene plants--one in Alberta and another in Ontario. As announced last June, the project also involves an upgrade and an expansion of its Corunna, Ont., cracker. When Nova is finished, the cracker will only crack natural gas liquids, mostly ethane from the Marcellus shale in the Pennsylvania area. There are a few new details, not many, though I think I understand the project a little better now. Here are the takeaways: 1) The company will have a decision “shortly” on what pipeline plan it is going with. CEO Randy Woelfel says the company is currently analyzing Sunoco Logistics’ “Project Mariner West”. This project involves a 25-mile pipeline being constructed between MarkWest Liberty’s Houston, Pa., plant and Sunoco Logistics’ pipeline grid in Vanport, Pa. 2) There is enough spare capacity in Alberta—the site runs at operating rates of about 85%--to accommodate a new polyethylene plant. 3) Nova says that the total capital needed for Nova 2020 could exceed $1.5 billion over the next seven...

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Dow Selling Polypropylene To Braskem

There has been about as much news this week about Dow Chemical as there has been about the debt ceiling. (These two stories have even converged). I almost want to rename this blog The (Dow) Chemical Notebook. In addition to building a ethanol-based polymers plant in Brazil, a massive $20 billion complex in Saudi Arabia, and a strong beat on earnings, Dow is also selling its polypropylene business to Braskem for $340 million--6.7x EBITDA for you deal nerds out there. I do have a few observations: 1) This is the least surprising deal ever. Dow has been vocal about selling the business; Braskem has been public about wanting to make another North American acquisition to follow its purchase of Sunoco’s polypropylene business. 2) Dow’s polypropylene catalyst and licensing business isn’t included in the transaction. Since it bought Union Carbide in 2001, Dow has done some really nice work in advanced donors for polypropylene catalysts, which have given the Unipol PP platform a shot in the arm. I am very curious to see what Dow does with that business. And for that matter, I am curious to see what the future has in store for Dow’s HDPE business—which it has indicated it might divest—and its stake in the Unipol polyethylene licensing firm Univation. 3) Dow’s release implies a sequel. “The two companies will continue to evaluate potential future collaborations on growth opportunities in connection with their strategies,” it said. 4) Nowadays, propylene is hard to come by in North America. I wonder what Braskem is doing about sources of...

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Notes Dow/Aramco’s Massive Saudi Project

As you may have heard, Dow and Saudi Aramco are moving forward with their new, $20 billion project for the Kingdom of Saudi Arabia. If you haven’t heard, the news story I wrote yesterday has all the relevant details. Here are a few more observations: 1) The joint venture will be called Sadara Chemical: “SA” stands for “Saudi Aramco”, “D” stands for “Dow”, “ARA” stands for “Arabia”. Dow CEO Andrew N. Liveris says “the word Sadara stands for progressive leadership, enhanced performance, and a status derived from quantifiable talent and proven mastery”. Um, OK. 2) The joint venture, ironically, is a major step forward in Dow’s transformation to more value-added chemicals. The idea here is similar to the one behind its major petrochemical investments in the U.S.: To back-integrate performance chemicals, such propylene derivatives and “solution polyethylene”. Also, there is a strong developing word orientation to the project. Dow projects that 70% of the output of this project will be marketed in Asia (~45%) and the Middle East (~25%). Dow operations downstream, such as a polyurethane systems house,  at a newly established industrial park will be a large customer of the joint venture. 3) I don’t expect much creep upward in the cost of this project. The $20 billion figure is being billed as an upper limit. Engineering, procurement, and construction comprise $12 billion of the cost. Another $8 billion is financing, startup, and stuff. Liveris noted that about half of the costs of the major elements of the project, such as the ethylene cracker, are already locked in. That said, other projects in the Middle East over the last business cycle busted budgets considerably. My suspicion, however, is that Dow built that into the number it is putting out. 4) The venture is really ready to roll. “We have bulldozers moving to the site in two weeks,” Liveris said during a conference call. That said, I have heard chemical engineers chuckle at the notion of site preparation being a sign of progress. 5) This is one of Dow’s last major loose strategic ends. Dow has been kicking this project around since 2007. Originally it was supposed to go up in Ras Tanura, but the partners changed venue last year. Considering all Dow went through during the financial crisis, that is a very minor hiccup in such a major project. Many other companies might have just walked away. 6) Another Dow loose end involves PIC of Kuwait. Dow is seeking $2.5 billion in arbitration hearings from PIC because of the failure of the proposed K-Dow petrochemical joint venture back during the financial crisis. It was the government of Kuwait...

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