News Focus: Georgia Gulf-PPG chlor-alkali deal is a big win for both

27 July 2012 00:00  [Source: ICB]

The planned $2.1bn (€1.7bn) merger between US-based polyvinyl chloride (PVC) producer Georgia Gulf and US-based PPG Industries' chlor-alkali business is a big win for both companies, providing significant product integration and tax benefits.

A financial community source with knowledge of the deal said: "The deal makes a great deal of sense, both from a synergy point of view and from taxes. 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."

US-based PVC producer Westlake made a hostile bid to acquire Georgia Gulf on January 13, for $30/share, or around $1bn. The approach was rejected by Georgia Gulf's management as being too low, as was a subsequent bid at $35/share.

"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. PPG will form a new company by carving out its chlor-alkali business through a spin-off or split-off. Then it will merge the new 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 spin-out of its chlor-alkali business to its own shareholders," the financial source said.

"To keep it tax-free, the PPG shareholders must own a majority of the newly merged company." PPG will receive $900m in cash in the deal, along with Georgia Gulf shares valued at $1.0bn according to its stock price on July 18.

Under the deal, PPG will shed debt of $95m, environmental and pension liabilities, along with other 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. It will be the third-largest chlor-alkali producer and second-largest vinyl chloride monomer (VCM) producer in North America.

SOLVING PROBLEMS

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

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

"The 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 amortization], probably transferring most of its environmental exposure and avoiding taxes."

He said it was also good for Georgia Gulf. "For Georgia Gulf, it adds upstream chlor-alkali capacity and grows its businesses substantially, while not overleveraging its balance sheet," the banker said.

Georgia Gulf's CEO, Paul Carrico, and his PPG counterpart, Charles Bunch, said the combined company will have enhanced vertical integration with significant US natural gas-driven chlor-alkali production.

"Approximately 70% integration to natural-gas-fired cogeneration will make the combined company one of the lowest-cost integrated chlor-alkali producers in the world," Carrico said, adding that the vertical integration will enhance plant operating rates.

The combined company is expected to achieve some $115m in annual cost synergies within two years, Carrico said. The companies expect about $40m/year in savings to come from their combined $1bn/year purchases of ethylene and natural gas. Optimization of operating rates is expected to yield $35m/year in savings and reductions in overhead and other expenses should come to around $40m/year.

MARKET IMPACT

"This is a big deal; this will be quite impactful," a source at a US chlor-alkali producer said, adding that it is still too early to talk in detail about the merger's effects. The industry source said the deal is not likely to put more product on the market and will simply create a new stream for PPG's existing chlor-alkali facilities.

A market participant in Mexico said it sees no immediate changes in the PVC business in that country. However, other market sources there are concerned that the merger will reduce competition among suppliers and could lead to higher prices for chlorine derivatives and caustic soda.

The deal follows another transaction in the chlor-alkali sector - US-based Olin's acquisition of US producer and distributor KA Steel Chemicals for $328m announced on July 18.

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

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," the source said. "I'm not sure this signals a new wave of consolidation in the chlor-alkali sector.

Additional reporting by Franco Capaldo, Ronald Coifman and Stefan Baumgarten


Author: Joseph Chang and Ken Fountain



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