Tags: Georgia-Gulf | PPG | Chemical | Unit

Georgia Gulf to Acquire PPG Chemical Unit for $1.9 Billion

Thursday, 19 Jul 2012 06:42 PM

Georgia Gulf Corp. agreed to acquire PPG Industries Inc.’s commodity-chemicals unit for $1.9 billion in cash and shares to gain factories that make raw materials used in the company’s plastic pipe and siding.

PPG, based in Pittsburgh, will spin off its chemicals unit and merge it with Atlanta-based Georgia Gulf, according to a joint statement today. PPG shareholders will own 50.5 percent of the new Georgia Gulf, the companies said.

Georgia Gulf, already the biggest North American maker of vinyl building products, will have $5 billion in sales as it becomes the second-biggest producer of vinyl chloride and the third-largest maker of chlorine and caustic soda on the continent. PPG, the world’s second-biggest coatings maker, is exiting commodities to focus on paints for homes and autos.

“The deal makes sense for both parties,” Hassan Ahmed, a New York-based analyst at Alembic Global Advisors, said in a telephone interview. “PPG wins by shedding their commodity business and getting the valuation bump associated with a pure- play specialty-chemical company. Georgia Gulf wins because this increases their integration into chlorine.”

PPG rose 7.5 percent to $111.96 at the close in New York. Georgia Gulf climbed 13 percent to $32.67.

Industry Consolidation

The transaction is the latest consolidation move in an industry marked by high production costs and competition from Asia. New factories coming on stream in China have increased supplies at a time when demand for polyvinyl chloride, a plastic known as PVC that’s used in construction, has waned in parts of North America and Europe.

The combined company will benefit from significant integration and scale, Georgia Gulf Chief Executive Officer Paul Carrico said in the statement. Carrico will lead the new Georgia Gulf, whose eight-member board will expand to 11 with the addition of three directors appointed by PPG, the companies said.

Georgia Gulf earlier this year rejected as too low an unsolicited $35-a-share buyout offer from Westlake Chemical Corp. Westlake withdrew the $1.2 billion bid on May 4.

PPG is a major supplier to Georgia Gulf and the companies have been discussing possible deals “for years,” including the type of merger announced today, Carrico said in a telephone interview.

‘Overall Value’

“We have always looked at the overall value for the shareholder,” Carrico said.

The acquisition is expected to be completed late this year or early in 2013 and is subject to the approval of regulators and Georgia Gulf shareholders. The transaction is valued at 5.1 times last year’s earnings before interest, taxes, depreciation and amortization, according to a joint slide presentation. Other deals related to PVC include Arkema SA’s sale of its vinyls business to Geneva-based investor Klesch & Co.

PPG’s commodity-chemicals unit accounted for $427 million, or 11 percent, of its total sales in the second quarter, the company said in a separate statement today. Earnings held steady at $106 million. The transaction will generate funds for growth and acquisitions to expand its main coatings and paint operations as well as present opportunities to pay down debt and buy back shares, PPG said.

Coatings Company

“This transaction is another major step in our strategic transformation into a more focused coatings and specialty products company,” Charles Bunch, PPG’s CEO and chairman, said in the statement.

The value of the transaction totals $2.1 billion, including the assumption of $182 million in debt and minority interest, the companies said in a webcast. The merged company also will assume some of PPG’s environmental and retirement-benefit liabilities.

“Given investor concern over potential cyclicality of the commodity chemicals business, we believe that the shares of PPG will react favorably to news of the divestiture,” Ghansham Panjabi, a New York-based analyst at Robert W. Baird & Co., who rates the shares outperform, said today in a note. “PPG remains committed towards growing its core coatings/optical businesses.”

Georgia Gulf and PPG structured the transaction as a so- called Reverse Morris Trust, avoiding the tax bill that PPG otherwise might have faced for the sale of a subsidiary. The U.S. Senate, in a highway bill passed in March, sought to limit the use of Reverse Morris Trusts. The measure was ultimately stripped from the version that became law.

Georgia Gulf was advised by Barclays Plc, Houlihan Lokey and law firm Jones Day. Lazard Ltd. is PPG’s financial adviser, with Wachtell, Lipton, Rosen & Katz acting as legal adviser.

Akzo Nobel NV is the world’s largest coatings maker.

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