Bloomberg News

Georgia Gulf Deal Seen 50% Higher as Housing Rebounds: Real M&A

January 24, 2012

Jan. 23 (Bloomberg) -- Georgia Gulf Corp., North America’s largest maker of vinyl construction products, is poised to secure the biggest takeover price increase in the U.S. as signs grow that the housing slump has bottomed.

Georgia Gulf’s stock is trading at $34.50, or 15 percent more than this month’s $30-a-share offer from Westlake Chemical Corp., the U.S. plastics maker controlled by the Chao family. That’s the widest gap of any pending U.S. takeover, according to data compiled by Bloomberg. Traders are betting Georgia Gulf is the most likely company in America to get a higher offer after Westlake’s $1.68 billion bid was lower relative to earnings than any other diversified chemicals deal since 2000, the data show.

While Georgia Gulf narrowly averted bankruptcy during the worst housing slump since the Great Depression, analysts now say the Atlanta-based maker of vinyl siding and window frames will post record sales as confidence among U.S. homebuilders rises to a four-year high. After its proposal was rejected as “financially inadequate,” Westlake could boost its offer more than 50 percent, according to Alembic Global Advisors. Mexichem SAB and Braskem SA may also bid, Dahlman Rose & Co. said.

“The next thing we’re going to see is a bump in the offer,” Yemi Oshodi, managing director of M&A and special situations trading at New York-based WallachBeth Capital LLC, said in a telephone interview. “It feels like the economy is getting better and it feels like housing is bottoming. This is one of the more aggressive hostile bids we have seen in a while and they’re not going away on just a ‘No.’”

‘Disciplined Acquirer’

Michael Freitag, a spokesman for Georgia Gulf, declined to comment on the company’s share price or whether it has been approached by other potential suitors.

“Westlake is a disciplined acquirer and we won’t pay more for Georgia Gulf than we think it’s worth,” said Robin Weinberg, a spokeswoman for Westlake. “We’ve made a fair offer with a significant premium. If Georgia Gulf’s board thinks there are opportunities that would justify increasing our proposal, they should sit down with us to explain what these are.”

After an initial takeover proposal in September failed to lead to “meaningful dialogue” with Georgia Gulf, Westlake made an unsolicited bid on Jan. 13 for $30 a share in cash, representing a more than 50 percent premium to the stock’s average price in the prior 20 days, data compiled by Bloomberg show. Including the assumption of Georgia Gulf’s $654 million in net debt, the deal is worth $1.68 billion, the data show.

Three days later, Georgia Gulf said it rejected Houston- based Westlake’s proposed offer and adopted a so-called shareholder rights plan to thwart hostile takeovers.

Relative Value

“The Westlake proposal is an opportunistic attempt to acquire the company’s uniquely positioned assets as we recover from an unprecedented downturn,” Paul Carrico, Georgia Gulf’s chief executive officer, said in the statement.

The proposal values Georgia Gulf at 6.4 times its earnings before interest, taxes, depreciation and amortization in the last 12 months, data compiled by Bloomberg show. That would be less than any billion-dollar deal for a diversified chemicals producer in more than a decade.

Georgia Gulf’s closing price of $34.50 a share last week indicates traders are betting on a higher bid.

“Clearly, Georgia Gulf’s worth more” than Westlake’s offer, Keith Moore, an event-driven strategist at Stamford, Connecticut-based MKM Partners, said in a telephone interview. “We’re sort of at a low point in the cycle and so Westlake is trying to pick them off at a low price.”

U.S. Housing Revival

Georgia Gulf’s stock has plunged 95 percent since its acquisition in October 2006 of Royal Group Technologies Ltd., a Canadian maker of building products, just as the housing market started to collapse.

Home values in the U.S. plummeted through 2008 and foreclosures reached records as the financial crisis deepened. Georgia Gulf, which reported more than a half-billion dollars of net losses during the slump, averted bankruptcy after getting repeated extensions on interest payment deadlines and exchanging almost all of its debt for equity in 2009.

Now, with the jobless rate decreasing from a 26-year high and mortgage rates falling to historical lows, the housing market may finally be showing signs of bottoming.

Sales of previously owned U.S. homes climbed for a third straight month in December, the National Association of Realtors said. This month, the National Association of Home Builders/Wells Fargo gauge of U.S. homebuilder confidence exceeded economists’ forecasts, reaching the highest level since June 2007 as all four U.S. regions improved.

Profit Estimates

That could spell a rebound for Georgia Gulf and make it a more valuable target. Based on analysts’ estimates, net income jumped 54 percent last year and will rise 30 percent more this year, data compiled by Bloomberg show. Georgia Gulf hasn’t had two straight years of profit growth in more than a decade.

Georgia Gulf is also benefiting from a decline in natural gas prices to a 10-year low. The gas is used to make polyvinyl chloride, or PVC. Georgia Gulf gets about 40 percent of sales from so-called chlorovinyls, data compiled by Bloomberg show.

Westlake would become the second-largest PVC producer in North America with its acquisition of Georgia Gulf, according to Goldman Sachs Group Inc.

Hassan Ahmed, co-founder and head of research at Alembic Global in New York, says that Westlake could afford to pay as much as $47 a share, which would value Georgia Gulf at about 8.6 times Ebitda. That would still be less than the median of 9 times for comparable deals, data compiled by Bloomberg show.

Mexichem, Braskem

Georgia Gulf could attract offers from Mexichem, the Tlalnepantla, Mexico-based chemicals producer that has acquired more than 15 companies since 2007, Braskem, Latin America’s largest petrochemicals maker, or Cie. de Saint-Gobain, Europe’s biggest building-materials supplier, according to Charles Neivert, a New York-based analyst at Dahlman Rose.

Mexichem, which said last week that its cash flow will increase this year with “possible acquisitions,” and Braskem could profit from gaining more sales in the U.S., he said.

Saint-Gobain of Courbevoie, France, could combine its PVC unit in the U.S. with Georgia Gulf’s business, Neivert said.

“We are not aware of any outreach or activity regarding Georgia Gulf,” Saint-Gobain spokeswoman Dina Silver Pokedoff said in an e-mailed response to the question of whether the company was considering a bid for Georgia Gulf.

Enrique Ortega, a spokesman for Mexichem, declined to comment on whether it is interested in acquiring Georgia Gulf. Courtney Flanagan, a spokeswoman for Sao Paulo-based Braskem, didn’t immediately respond to telephone calls and e-mails seeking comment.

“The hint of a rebound has already begun to move through the market,” Dahlman Rose’s Neivert said in a telephone interview. “You had the homebuilders talking a little bit more positively. So once you get that information in the marketplace, it makes it very hard to go in with what is a fairly low bid.”

--With assistance from Carlos Manuel Rodriguez in Mexico City and Jack Kaskey in Houston. Editors: Michael Tsang, Julie Alnwick.

To contact the reporters on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net; Anjelica Tan in New York at atan224@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net.


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