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Georgia Gulf Will Buy Royal Group

Deal will create a large, back-integrated vinyl products supplier

by Alexander H. Tullo
June 19, 2006 | A version of this story appeared in Volume 84, Issue 25

Movin' On Up
Credit: Georgia Gulf Photo
Georgia Gulf has a chlorovinyls complex in Plaquemine, La.
Credit: Georgia Gulf Photo
Georgia Gulf has a chlorovinyls complex in Plaquemine, La.

In a move that will form a company integrated from brine to vinyl siding, polyvinyl chloride maker Georgia Gulf has agreed to purchase Woodbridge, Ontario-based building products firm Royal Group Technologies in a transaction valued at about $1.6 billion.

Georgia Gulf is offering $11.82 per share for the company, 43.5% more than Royal's closing price on the day before the merger was announced on June 9.

About 70% of Georgia Gulf's $2.3 billion in 2005 sales came from chlorovinyl products such as vinyl chloride, PVC resin, and vinyl compounds. Royal's $1.6 billion in sales last year was mainly from pipe, moldings, window profiles, siding, sheds, and other PVC products.

With the deal, Georgia Gulf will join Formosa Plastics and Westlake as U.S. PVC resin companies with large downstream businesses. Georgia Gulf says it will realize $64 million in cost savings from the merger. The company also says it expects to divest Royal businesses with about $200 million in annual sales.

The deal puts into doubt the future of Georgia Gulf's aromatic chemicals business, from which it currently draws about 30% of its sales. "It is fair to say we are not wedded to this business, as we once were," Georgia Gulf CEO Ed Schmitt said during a conference call with financial analysts.

Wall Street hasn't been receptive to the deal, and the call was at times contentious. "At first glance, it is a stretch in terms of the numbers," one analyst said. "The question here is the price you are paying."

Frank J. Mitsch, an analyst for BB&T Capital Markets, lowered his rating on Georgia Gulf from "buy" to "hold," writing to clients: "GGC (Georgia Gulf Corp.) has had a successful past in acquisitions (Condea Vista, North American Plastics), but for now, we do not see the same type of upside in the share price than if GGC remained as a stand-alone powerhouse in chlorovinyls."

Georgia Gulf shares dropped 14% to $26.23 on June 9. They slipped another 6% on June 12.



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