20 January 2012 16:57 [Source: ICIS news]
By Joseph Chang
NEW YORK (ICIS)--Hostile takeovers are rare in the conservative chemical sector, but cash-laden companies seeking growth may have no other option in an environment where there is scant availability of high-quality businesses.
US-based petrochemical and polymers producer Westlake Chemical went hostile with an unsolicited $30/share, or $1.0bn bid for US-based chloralkali and polyvinyl chloride (PVC) company Georgia Gulf on 13 January.
A combination would boost Westlake’s position in chloralkali and PVC in the North American market, and also add a vinyl building products component.
The bid has been rejected by Georgia Gulf as “financially inadequate” and characterised as “an opportunistic attempt” to buy the company as it recovers from a severe downturn, “[depriving] shareholders of its inherent value”.
But most in the financial community believe a deal will eventually get done – either with Westlake or other potential buyers – and at a higher price than the $30/share on offer from Westlake. Indeed, investors seem to agree, with shares of Georgia Gulf trading well above Westlake’s bid at $34.57 at close on Thursday 19 January.
Frank Mitsch, analyst with US investment bank Wells Fargo, pegs the chances of a $30/share deal at “slim and none… and slim is boarding a train out of town”.
He points out that Georgia Gulf’s shares were trading above $40 within the past 12 months.
“And as each day passes, we are closer to a housing recovery and a surge in Georgia Gulf’s results,” said Mitsch. “Among the large shareholders are folks experienced with commodity markets and we believe likely would not be pleased to forego the potential upcoming recovery for a mere $30.”
Westlake’s $1.0bn bid values Georgia Gulf at 6.0 times estimated 2012 earnings before interest, tax, depreciation and amortization (EBITDA) – essentially in-line with US commodity chemical company cycle average multiples, noted Hassan Ahmed, analyst with investment advisory firm Alembic Global Advisors.
Ahmed called the proposed combination “strategically sound,” noting that both are players in the North American vinyls market.
Charles Neivert, analyst at US investment bank Dahlman Rose & Co., called Westlake’s $30/share bid for Georgia Gulf inadequate, based on a number of valuation metrics. He values Georgia Gulf at $45/share, based on a 6 times multiple on normalized EBITDA of $350m.
Other bidders could also emerge for Georgia Gulf, likely from foreign companies, analysts said.
“In thinking about other possible bidders, we believe interest will be high from offshore companies, particularly since the US is now the cheapest place on the planet to produce PVC,” said Mitsch.
“We do see the possibility of other bidders entering the market, including building products companies and foreign producers, especially out of Latin America, where a large proportion of US vinyl exports go,” said Dahlman Rose’s Neivert.
He does not see Westlake moving past the $40/share price level for Georgia Gulf – if it even reaches that level.
“Much to their credit, Westlake has always been one of the shrewdest, most hard-nosed, penurious asset acquirers in the business. They fight over every dollar. This is a company which managed to get a significant discount (we believe over 40%) on the cost of their first ethylene cracker through the use of great bargaining tactics. This quality should be worn as a badge of honour,” said Neivert.
“We do not expect the company to alter its nature in going after Georgia Gulf, which does not bode well for a much higher bid. However, if our estimates of Georgia Gulf’s ultimate earnings power are accurate, Westlake would still gain accretion on the higher offer,” he added.
Three other companies have product overlap with Georgia Gulf in the US market – Brazilian petrochemical major Braskem, Taiwanese conglomerate Formosa Plastics and Texas-based but Japanese-owned PVC producer Shintech, noted Alembic’s Ahmed.
“Both Formosa and Shintech have never acquired any assets in the US and have grown organically, suggesting that they may not partake in a bid for Georgia Gulf,” said the analyst.
“Braskem is a wild card – recently it has participated in US commodity chemical M&A in product areas in which it is already a player. That said, Braskem’s balance sheet is already stretched with a net debt to capital of 52% so we would assign a low probability to the company stepping in to acquire Georgia Gulf. We see Westlake as the most obvious suitor.”
Another potential bidder could be Mexichem, the largest PVC producer in Latin America. The company had sales of Mexican Peso (Ps) 46.33bn ($3.52bn) in the 12 months through the third quarter of 2011. Its net debt of $949m gives it a very modest debt/EBITDA ratio of 1.16 times – well below its internal target of 2.0 times.
($1 = Ps0.076)
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