Georgia Gulf deadline key to deciphering Westlake strategy

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Westlake Chemical’s (NYSE:WLK) strategy to acquire Georgia Gulf (NYSE:GGC) may become clearer ahead of a deadline to make proposals at the target’s AGM, a source familiar with the situation told dealReporter.

Last week, Westlake bumped its unsolicited offer for the Atlanta, Georgia-based chemicals company to USD 35 per share and announced it would not nominate director candidates for the target’s 2012 annual general meeting. The proxy filing window for Georgia Gulf runs from 12 January through 11 February. Last year, the company held its AGM on 17 May.

Georgia Gulf has rejected Westlake twice on grounds that both of its offers undervalue the company which is poised to reap the benefits of an improving economy.

“The next [week] will be important,” the source said, referencing the Saturday proxy deadline.

So far the strategies employed by Westlake to catch Georgia Gulf’s attention have been unusual from other hostile deal situations, the source said. By not nominating nominees, Westlake’s CEO, Albert Chao, may be showing that he does not want pay more than he intends to, the source said, adding that most hostile bidders lose proxy fights because the offer is not high enough.

Westlake declined to comment on its takeover strategy.

An industry source described the Westlake CEO as being disciplined on price, categorizing him as a “deep value” executive. The Chao family owns approximately 70% of the company.

Westlake is trying to earn some goodwill with Georgia Gulf by not going fully hostile on it in hopes that the parties are ultimately able to engage in a dialogue and strike a deal, said a second industry source. “They want to do a friendly deal,” said a third industry source.

Questioned whether Georgia Gulf is in discussions with alternative parties, the source familiar declined comment but said the company is not running an auction nor is it actively trying to sell itself. With a USD 35 per share offer on the table, he said the company “does not have to do anything.”

The source familiar said there were whispers among the investor community that Westlake has room to marginally increase its current offer. The same source declined to conjecture on what an acceptable sale price would be for Georgia Gulf.

The third industry source cautioned about the risks of overpaying for a building material asset, equating a bet on Georgia Gulf to a call on the housing recovery. But when housing does recover, the first industry source said the upside scenario for Georgia Gulf is believable.

“There is no way the Georgia Gulf team is ever going to sit at the table with you,” claimed a fourth industry source, who argued that over the last few years the company has been through the ringer with its CAD 1.7bn acquisition of Royal Group Technologies in 2006 that nearly landed it in bankruptcy. “They don’t want someone coming in and taking their glory,” he said.

As such, the same industry source said if he were Westlake, he would consider taking an offer straight to shareholders. But the source familiar predicted Westlake is unlikely to launch a hostile tender offer for Georgia Gulf, arguing that if it intended to do so it would have nominated individuals to the Georgia Gulf board.

Alternative strategic suitors for Georgia Gulf could include Occidental Petroleum (NYSE:OXY), Dow Chemical (NYSE:DOW), Olin (NYSE:OLN), PPG Industries (NYSE:PPG) and Mexichem, said two of the industry sources.

Occidental Petroleum could outbid Westlake for Georgia Gulf, but the company does not have a history of doing this, said the fourth industry source. The second industry source said that while Occidental “likes” the chemicals business given it is a cash flow generator, its primary focus is its oil and gas business. “Oxy is unlikely to bid unless they get Georgia Gulf for a song,” he added.

The same industry source said Mexichem and Formosa Chemicals are the likeliest alternative suitors for Georgia Gulf.

Drawing a comparison to the current Georgia Gulf/Westlake situation, the first industry source said while other parties had an interest in Airgas (NYSE:ARG) they had not surfaced for the company because they did not want to get involved in the hostile Air Products (NYSE:APD) situation.

He and two of the industry sources discounted financial sponsors as suitors for Georgia Gulf. Commodity chemical plants are volatile and harder to leverage, said one of the industry sources, while another of the sources said he believed private equity firms would have a hard time getting to USD 30 per share.

All of the industry sources said the chance a white knight surfaces for Georgia Gulf is low, adding that they could not see alternative suitors going toe-to-toe with Westlake, in part given Georgia Gulf is not a pure-play chemicals company.

“Nobody can touch Westlake on the synergies with Georgia Gulf,” said one of the industry sources, also highlighting the Houston, Texas-based company’s clean balance sheet. As of 30 September, the company had cash and cash equivalents of USD 630m and USD 765m in long term debt.

Georgia Gulf will have to weigh the risks of its stock trading down to the high teens to low USD 20s were Westlake’s bid to disappear, said the second industry source. “Some [shareholders] may think USD 35 is not bad given that Georgia Gulf is not necessarily the best of the pack in the chemicals business and the recovery of the housing market is some distance away,” he added.

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