Georgia Gulf to Buy Canadian Firm

By Robert Luke, The Atlanta Journal-Constitution

Jun. 10–One plus one equals more than two.

That’s how Georgia Gulf’s chief executive, Edward Schmitt, described the chemical maker’s proposed $1.6 billion acquisition of Royal Group Technologies Ltd., a Toronto-based maker of vinyl building and home improvement products such as window frames, siding, decorative moldings and pipes and fittings.

But Wall Street is wondering whether Georgia Gulf’s calculations of the deal’s benefits are correct, or fanciful.

Shares of the Atlanta-based company tumbled as much as 16.7 percent Friday before finishing at $26.23, down $4.26. More than 4.5 million shares changed hands, or about seven times average daily volume over the past six months.

Royal Group’s shares, which trade on the Toronto and New York stock exchanges, closed at $11.28, up $3.28. A day earlier, they fell to a 52-week low of $7.76.

The purchase is a bold one for Georgia Gulf, known for its conservative management. The deal, for roughly $1.123 billion in cash and the assumption of $433 million of debt, would substantially increase Georgia Gulf’s revenue and put it squarely in a new business.

Georgia Gulf, with annual sales of $2.3 billion, makes basic chemicals, including the vinyl compounds used by Royal Group in its products.

Georgia Gulf reckons it can transform Royal Group, with annual sales of about $1.7 billion Canadian, into a more profitable enterprise by providing it with raw materials and advanced resin and compound technology. It also figures it can wring out additional costs by, among other things, consolidating production facilities.

Georgia Gulf estimates the acquisition could boost its earnings next year “in the mid-to-high single digits,” excluding one-time charges.

But in a conference call, analysts questioned the timing of the deal, expressing concern that Georgia Gulf could be overpaying for Royal Group at a time when the housing industry is showing signs of slowing.

One analyst noted that the purchase price is more than the market value of Georgia Gulf’s shares — $897 million at Friday’s closing price.

Schmitt indicated those concerns are unfounded.

“We believe the housing market, regardless of what it is doing today, has long-term growth opportunities,” he said.

The purchase also can help Georgia Gulf inoculate itself against exposure to volatile raw materials and energy costs, he said.

“It’s a natural hedge to Georgia Gulf’s chemical business,” Schmitt said.

Royal Group, with 7,800 employees, has been up for sale for more than a year amid accounting and legal issues surrounding dealings under founder and former Chief Executive Vid De Zen, who relinquished control of Royal Group early last year.

The company, which lost $19.6 million Canadian in its latest quarter, recently settled with the U.S. Justice Department over the accounting issues.

Georgia Gulf, which expects to complete the acquisition by September, said the potential cost of resolving those accounting and legal issues is incorporated into the purchase price.

Georgia Gulf said it has secured debt financing for the deal, which requires the approval of regulators and Royal Group’s shareholders. The latter will receive $11.82 a share, based on an exchange rate of $1.10 Canadian to the U.S. dollar.

To help pay for the deal, Georgia Gulf said it could sell $200 million of Royal Group’s assets, including real estate and certain businesses.

Georgia Gulf also said it would consider the sale of its existing aromatics business, which last year accounted for 30 percent of total revenue.

“If someone is interested in talking to us about it, we would be interested in those discussions,” Schmitt said.

The aromatics business produces chemicals such as cumene and acetone.

Georgia Gulf’s chlorovinyls business, which produces the compounds used in Royal Group’s products, accounted for 70 percent of revenue.

The Associated Press contributed to this article.

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