Georgia (Gulf) On My Mind, Or Is It Axiall?: Investors Sing An Old Sweet Song as An Exchange Offer Brings Profits, New Name

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The trend towards tax-efficient divestitures continues with Axiall (AXLL) – previously called Georgia Gulf Corporation – obtaining PPG’s (PPG) former commodity chemicals business using a Reverse Morris Trust.  The trend of using Reverse Morris Trusts to ‘sell’ divisions has been previously reported by Stock Spinoffs here.

In the transaction, PPG created a short-lived spinoff, Eagle Spinco, and allowed all its shareholders the opportunity to exchange their shares for shares of Eagle Spinco (at an 11% premium to the PPG share price).  Before its separation, Eagle Spinco moved $900 million of cash to its parent and assumed $95 million of debt.  PPG claims that the divestiture will allow it to focus on coatings and specialty products.  What’s in it for Georgia Gulf?  The transaction will make it a much bigger company, and is aimed to produce returns to scale along the lines of $115 million/year.  Immediately after the separation, Eagle Spinco was merged into Georgia Gulf Corporation – with former PPG shareholders owning 50.5% of the new entity and Georgia Gulf shareholders owning 49.5%.

Georgia Gulf subsequently changed its name to “Axiall.”  We’re not sure where the name comes from, but a quick look at the company website reveals they want to emphasize their recent transformation, claiming that “Axiall is a new leader in the chemistry sector.”  Well, what does it look like to be a new leader in the sector?

The combination will make Axiall the number 2, 3, or 4 North American producer in its product segments.  An investor presentation gives pro-forma EBITDA of $670 million versus GGC standalone at $266 million – before any synergies (numbers are last twelve months as of 9/30/2012).  Management also believes the new entity will be levered to any recovery in home-building, with a normalized rate of housing construction contributing an additional $100 million in EBITDA.  The new Axiall has $1.5 billion in total debt, which with the current market cap of $4.15 billion and $67 million in cash gives Axiall an enterprise value of $5.6 billion.  Today’s trailing pro-forma EV/EBITDA (excluding any claimed synergies) is 8.33, putting Axiall right in the same valuation ballpark as Dow Chemical (DOW) at 8.23 and Westlake (WLK) at 8.89 (Source: Yahoo Finance).

Investors seem enthusiastic about the company’s prospects – bidding shares up 25% since the exchange offer closed.  At least a few investors have made a case for the shares here, and here.

Disclosure: Author holds a long position in Axiall.

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