FocusWall Street praises Georgia Gulf-PPG deal

19 July 2012 22:04  [Source: ICIS news]

PPG plant in LouisianaBy Joseph Chang

NEW YORK (ICIS)--The planned $2.1bn (€1.7bn) merger between Georgia Gulf and PPG Industries’ chlor-alkali business is a big win for both companies, investment bankers and analysts said on Thursday.

“The deal makes a great deal of sense, both from a synergy point of view as well as taxes,” said a source in the financial community with knowledge of the deal.

“Both companies have been aware of this opportunity for some time and have been talking for months – likely prior to Westlake’s approach of Georgia Gulf,” he added.

US-based chlor-alkali and polyvinyl chloride (PVC) producer Westlake made a hostile bid to acquire Georgia Gulf on 13 January, for $30/share, or around $1bn. The approach was rejected by Georgia Gulf’s management as being too low, along with subsequent approach at $35/share.

On 4 May, Westlake withdrew its offer to buy Georgia Gulf, citing non-responsiveness by the latter’s management.

“Georgia Gulf may have rejected Westlake’s advances because it knew something was cooking with this deal,” said Telly Zachariades, partner at global investment bank The Valence Group, which did not advise on the deal.

The innovative deal structure between Georgia Gulf and PPG will avoid taxes, noted the source.

PPG will form a new company by carving out its chlor-alkali business through a spinoff or split-off. Then it will immediately merge this company with Georgia Gulf or a Georgia Gulf subsidiary in what is called a Reverse Morris Trust transaction.

The merger will result in PPG shareholders receiving around 50.5% of the shares of the newly merged company, and Georgia Gulf shareholders owning 49.5%.

“PPG will do a tax-free spinout of its chlor-alkali business to its own shareholders. To keep it tax-free, the PPG shareholders must own a majority of the newly merged company,” said the financial community source.

The transaction essentially achieves the same result as a straight divestiture of PPG’s chlor-alkali business but without the heavy tax burden. PPG will receive $900m in cash in the deal along with Georgia Gulf shares valued at $1.0bn as of its stock price on 18 July.

PPG sheds debt of $95m, environmental liabilities along with pension assets and liabilities, and other post-employment liabilities associated with the business.

The deal, which will create an integrated vinyls company with around $5bn in sales, is expected to be completed in late 2012 or early 2013.

“This is a great transaction for both sides. PPG has always viewed the chlor-alkali assets as a non-core business and it’s been available for years,” said Zachariades.

A sale of the PPG chlor-alkali assets posed three obstacles – price, environmental exposure and tax leakage, noted the banker.

“They way PPG is doing the deal solves all these problems. It is getting a reasonable price at around 5 times EBITDA [earnings before interest, tax, depreciation and amortisation], probably transferring most of its environmental exposure and avoiding taxes,” said Zachariades.

“For Georgia Gulf, it adds upstream chlor-alkali capacity and grows its businesses substantially, while not overleveraging its balance sheet,” he added.

The deal follows another transaction in the chlor-alkali sector – US-based Olin’s acquisition of US producer and distributor KA Steel for $328m announced on Wednesday.

“The Olin deal on its merits also makes a ton of sense, as KA Steel is already a big distributor for Olin,” said the financial community source.

However, the two deals do not necessarily signal a new wave of deal activity in the sector.

“These are both highly strategic deals based on their own merits. I’m not sure this signals a new wave of consolidation in the chlor-alkali sector,” said the source.

“It’s just a coincidence that the Olin-K.A. Steel deal happened around the same time. But it is indicative of the continued buoyancy of the chemical M&A market,” Zachariades said.

Wall Street analysts also were largely positive on the Georgia Gulf-PPG deal for both companies.

“With the addition of PPG's chlor-alkali business, Georgia Gulf will become fully integrated on the chlorine side of the equation,” noted Frank Mitsch, analyst with US-based investment bank Wells Fargo.

“With the combined entities, the company expects cost synergies of $115m to be realised in the first two years, coming from the streamlining of procurement/logistics, reduction of overlapping overhead/technology, and operating rate optimisation,” he added.

Mitsch expects the deal could be earnings accretive by over $1.00/share for Georgia Gulf.

The deal will also benefit PPG as it becomes more of a pure–play coatings and specialty chemicals company, warranting a higher stock market valuation, he said.

Investors cheered the deal, sending shares of Georgia Gulf up $3.42, or 11.9%, to $32.27, and shares of PPG up $7.91, or 7.6%, to $112.10 in late afternoon trading on the New York Stock Exchange.

($1 = €0.82)

By: Joseph Chang
+1 713 525 2653

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