Strange Deal Creating a Good Return for Shareholders

Mike is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Note: This post originally indicated PPG would make a special dividend payment to shareholders. That is not the case. It has been corrected.

In mid-July of 2012, Pittsburgh-based PPG Industries (NYSE: PPG) announced its intention to spin off its "commodity chemicals" arm and merge the newly-formed company with Atlanta-based Georgia Gulf Corp. (NYSE: AXLL) in a deal valued at over $2 billion. The complex deal's terms involve a tender offer and share exchange that will help to finance its hefty price tag. Although the two companies involved are fairly strong, this deal only adds to Georgia Gulf's sizable leverage. While it appears poised to offer solid returns to enterprising shareholders, this deal should give inexperienced investors pause. If nothing arises to change the merger's terms, it should close by the end of the first quarter of 2013.

About PPG Industries and Georgia Gulf

PPG Industries is a diversified materials and chemical-production company. It focuses primarily on the production of various types of coatings and coated surfaces that can be used in a wide range of industrial and consumer applications. In addition to its commodity chemicals division, it operates a division that constructs polarized screens for sunglasses, windshields and commercial buildings. It also produces signage, specialized military equipment, sealants, tire accessories and various battery components. Separately, PPG also operates a "caustic chemicals" division that manufactures and sells volatile liquids and powders like chlorine, alkaline battery juice, fiberglass and PVC. The company earned $941 million on gross revenue of $15.2 billion in 2012.

Georgia Gulf makes chemicals and solids for the construction and consumer-products industries. Its products include PVC materials, electro-vinyl, chlorine, battery components, doors, decorative fixtures, pipe fittings, rails, fencing materials and many others. It also offers scented chemicals that offset the unpleasant smells associated with many industrial-strength solvents and building materials. The company employs nearly 4,000 people and earned about $84.4 million on $3.2 billion in gross revenue in 2012.

How the deal is structured

Under the terms of the deal, PPG's shareholders will own more than 50 percent of the spun-off company. The considerations being tendered by Georgia Gulf include $900 million in cash, "assumed debts" worth about $95 million, and about $1 billion in the company's own stock. The new company will be named Axiall (AXLL - NYSE) and should begin trading shortly before the deal's closure. As a result of the deal, the number of outstanding Georgia Gulf shares will roughly double.

The terms of this tender offer are complex. For starters, PPG will receive $900 million in cash. Relative to PPG's recent closing price of $144.21 per share, this represents a windfall of about 4 percent. Thanks to the employment of a reverse trust, this cash transaction will be exempt from taxation.

As part of the deal, PPG shareholders will also receive 3.2562 of Georgia Gulf shares. The company is set to release the exact terms of the deal at the commencement of the exchange. However, it appears that the deal will value each newly-created Georgia Gulf share at $28.55. Assuming that the number of Georgia Gulf shares doubles, this represents a premium of 13.6 percent over the company's current per-share price of $50.24.

Competition and complications

As it currently stands, there are no pending shareholder lawsuits or rival offers for Georgia Gulf. At this point, it appears unlikely that anything of the sort will arise to delay or derail the deal. However, the spin-off and merger remains subject to a customary regulatory investigation and votes by PPG and Georgia Gulf shareholders. There are no indications that any of these hurdles will prove to be problematic.

Long-term prospects and outlook

This deal represents the culmination of an effort on the part of PPG's management team to reorient and narrow the company's focus. According to its executives, PPG strives to become the dominant player in the industrial coatings industry. Although it is well on its way to achieving this goal, the company still must contend with multinational competitors like Houston-based Westlake Chemical (NYSE: WLK). Westlake is a major rival of PPG and Georgia Gulf. In fact, the company floated a hostile takeover bid worth just 70 percent of the value of the current deal. The success of Georgia Gulf's executive team in repelling this bid was instrumental in increasing the company's perceived value.

Going forward, Axiall appears likely to create value for current shareholders of both PPG and Georgia Gulf. The company will have annual revenue of more than $5 billion and looks to exploit a stable market for industrial chemicals. Although these operations are not glamorous, they are essential to the smooth functioning of the economy. Further, they are somewhat insulated from the mercurial business cycles that affect organizations in other areas of the materials space. As such, Axiall may offer a long-term "recession-proof" play for enterprising investors.

There are other ways to play the deal as well. Conservative investors may wish to purchase PPG's shares and take advantage of the synergies that the spin-off could create. More ambitious investors could short Georgia Gulf's inflated stock in anticipation of a drop in its value in the aftermath of the deal's closing. In any event, this complex deal represents a rare opportunity with the potential to produce tremendous returns.


mthiessen has a long position in PPG and a short position in GGC until the PPG shares automatically exchange for GGC shares because of the tender offer. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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