PPG will merge unit with Georgia Gulf
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PPG Industries announced Wednesday plans to spin off its commodity chemical division and then, using a complicated maneuver, merge that operation with Georgia Gulf Corp., an Atlanta-based chemicals manufacturer, in a deal valued at $2.1 billion.
Investors responded positively, sending PPG shares up more than 7 percent to close at $111.96. Georgia Gulf shares closed at $32.67, up more than 13 percent.
Management of the two companies presented the deal, which must be approved by Georgia Gulf shareholders and receive tax and regulatory approvals, as a way to build a powerful business focused on chlor-alkali and vinyl-chloride -- chemicals used in everything from IV bags to PVC pipes for sewers. The merged company is expected to have about $5 billion in annual revenue.
The deal also addresses issues for each of the companies, helping PPG shed a business that the company sees as not core to its strategy while Georgia Gulf will bulk up after earlier this year fending off an unsolicited offer from another chemical company.
"The transaction complements the strategic initiatives of both companies and is a unique opportunity to create opportunity for both sets of shareholders," said Charles E. Bunch, chairman and CEO of PPG, in a conference call with analysts Wednesday.
"This is a unique opportunity to do something together that neither company really could have accomplished and achieved on its own," said Paul Carrico, CEO of Georgia Gulf, on the call.
Management of the newly merged company will include employees from both Georgia Gulf and PPG's commodity chemicals division, according to a PPG press release. Approximately 2,000 people work in PPG's commodity chemicals business globally, according to company spokesman Jeremy Neuhart.
The immediate impact on jobs at the company's Pittsburgh headquarters is unclear.
"We will have a continued presence in Pittsburgh," said Alan Chapple, director of corporate communications for Georgia Gulf, noting that the new company is looking to have an office here. He said he did not know the net effect on jobs in Pittsburgh. "We're going to be in a position to create value."
The $2.1 billion valuation of the deal includes approximately $900 million in cash to be paid to PPG, $95 million in assumed debt, $87 million in minority interest and $1 billion of Georgia Gulf company stock (based on the July 18 close) to be allocated to PPG's shareholders.
Mr. Bunch said the benefits will include better growth prospects for the reconfigured businesses, as well as $115 million in cost synergies and tax efficiencies. The deal is meant to be done using a reverse Morris Trust, which should allow the transaction to proceed without any tax payments from PPG.
Approximately 50.5 percent of the newly merged company, yet to be named, will be owned by PPG shareholders, with the rest held by Georgia Gulf shareholders.
Laurence Alexander, an analyst with New York-based Jefferies & Co., gave a favorable review of the deal, noting that PPG investors had been looking for a commodity exit and that the valuation appears fair.
The transaction, expected to close at the end of this year or early next year, reflects PPG's effort to focus on coatings and specialty materials.
Mr. Bunch said coatings and specialty materials account for 92 percent of PPG's sales. "We're continuing to look at opportunities in the coatings space. We think there will be more of those opportunities as you see some changes in growth rates and economic conditions around the world," he said.
At the same time, Georgia Gulf wanted access to the Pittsburgh company's chlorine production. By producing rather than purchasing chlorine, Georgia Gulf will be able to cut costs, said Mr. Chapple.
"There are a lot of other opportunities along the chlorine value chain to sell products, to gain entry into new markets and to create value," he said.
While Georgia Gulf considered "several options," that opportunity as well as the companies' previous working relationship at Lake Charles in Louisiana made the merger a good fit, he said.
Earlier this year Georgia Gulf resisted attempts for a hostile takeover from Houston-based Westlake Chemical.
The deal was announced the same day that PPG released second quarter earnings, reporting net income of $362 million, compared to $340 million in the same period last year. Net sales were $4 billion, the same as last year.
Mr. Bunch noted the company managed to produce the net income gain despite stalled sales in Europe and weak currency exchange rates in Latin America and Europe.
First Published July 20, 2012 12:00 am