Carbide in Drastic Bid to Rebuff GAF : Chemical Giant to Sell Consumer Brands, Buy Back 55% of Its Stock, Double Debt
Union Carbide moved Thursday to elude the takeover grasp of GAF Corp. with a plan that will alter the very nature of the company by selling off its most familiar brand names and more than doubling its debt load.
Under the program approved during the day by the company’s board, the resulting Union Carbide will be about one-third smaller than it is today, with 25,000 fewer employees and a considerably more uncertain financial future.
“The company’s whole financial structure will be weakened,” said Anthony Ludovici, a chemical industry analyst for the New York investment firm of Tucker, Anthony & R. L. Day. But he and other analysts predicted that the plan would raise almost insurmountable obstacles for GAF’s takeover bid, which it sweetened again Thursday to $78 a share.
Among the brand-name product lines historically associated with Union Carbide and destined to be sold as part of its defensive maneuver are Eveready batteries, Glad plastic wrap and Prestone and Simoniz automotive products.
In all, after the divestiture Union Carbide will have sales of about $6 billion to $7 billion annually rather than the more than $9 billion of recent years.
The company will repurchase 55% of its shares for a cash-and-securities package that it values at $85 a share, will increase its regular annual dividend by about one-third and will split the remaining shares 3-for-1 in an effort to attract small retail investors to the stock.
Trading in Union Carbide shares was halted for much of the day on the New York Stock Exchange in anticipation of the announcement. Before the suspension, shares were quoted at $72.25, up $1.25. GAF shares closed at $53.25, down $5.875, in anticipation of the Carbide news and after it raised its debt-financed takeover bid to a total of $5.5 billion.
Thursday’s program would be Danbury, Conn.-based Union Carbide’s second major restructuring since the Bhopal, India, disaster of December, 1984, when a chemical plant operated by a subsidiary spewed forth a cloud of poison gas that killed more than 1,700 residents of the surrounding Indian slums and injured scores of thousands more.
Facing a revolt in the financial and shareholding communities, the company in August announced plans to eliminate 4,000 salaried jobs, repurchase $550 million of its stock and take a $1-billion write-down in its ailing petrochemicals and metals businesses, all to strengthen its market price. Carbide said this week that 4,500 workers have accepted voluntary severance under the program and that it has raised more than $1.2 billion by selling unwanted assets and absorbing $509 million in pension fund surplus.
After the program announced Thursday, Union Carbide will resemble in many ways the company envisioned by GAF after its proposed takeover. It will have more debt than equity and will have sold off a central asset--its consumer goods unit.
Its overall financial structure will be akin to that of such oil companies as Phillips Petroleum, Unocal and Arco, which repurchased large blocks of their shares and raised their debt levels to more than 70% of their total net worth in order to discourage corporate raiders from buying them.
But Union Carbide executives said they considered those steps only after rejecting other customary takeover defenses, including seeking a “white knight” to make a friendly counter-bid and or even buying GAF itself.
“Left to our own devices, we would certainly not be operating such a highly leveraged company and one without our consumer business,” Carbide President Alec Flamm said in an interview. “But that business was a centerpiece of GAF’s tender offer, in that they indicated they would sell it to repay their debt. Our proposal is to take that asset and distribute it to our shareholders instead of the raider’s shareholders.”
GAF ‘Disappointed’
The centerpieces of the company, he said, would be its industrial gas and technology units, which have also been among its top performers. “This won’t be some little residual corporation but one with some very sound businesses.”
GAF Chairman Samuel Heymann, who took over that chemicals concern in a hard-fought 1983 proxy contest, was unavailable for comment Thursday. In a prepared statement, GAF said it was “disappointed” that Union Carbide had refused to negotiate over its bid. The statement said that GAF executives would study the Carbide plan, “and as soon as we have completed our analysis, we will respond accordingly.”
But Wall Street professionals said Carbide’s move appeared likely to derail the GAF bid, which began Dec. 9 when GAF offered $68 in cash for 67% of Carbide’s outstanding share. GAF subsequently raised its bid twice, most recently Thursday morning, when it offered $78 a share for 100% of Carbide’s shares.
Among other considerations, Carbide’s sale of its consumer goods line will remove the one asset that GAF was most likely to sell itself to pay off the debt it was planning to float to finance its bid. Moreover, a debt-laden Union Carbide will be a less alluring target for any acquirer.
Carbide’s share repurchase would also so reduce the outstanding shares available for purchase by GAF that it would be impossible for GAF to acquire the minimum two-thirds of outstanding shares that its lenders require.
Hold Line on Stock Price
Finally, by raising its annual dividend to $4.50 a share from $3.40, and pledging to return to shareholders in a special dividend all proceeds from the consumer lines sale in excess of their book value of $1.1 billion, analysts say that Carbide has ensured that the price of the stock remaining in the market after its repurchase will remain in the $70 to $75 range, an attractive prospect for investors. Company executives say they hope the bolstered dividends will support the stock at close to the $85 offered in the repurchase.
Many securities professionals following the stock said Thursday that the restructured company will have less flexibility in dealing with financial adversity, including any recession and particularly any large judgment or settlement of claims from the Bhopal disaster.
While not acknowledging that the program will have an effect on Bhopal claims, Flamm did express concern about the company’s heavy debt load.
“We’d look not quite as severely leveraged as in a leveraged buy-out (in which companies are taken private on borrowed funds), but we’ll have to operate very carefully and with an eye on cash,” he said.
As it happens, a hearing on whether to force Bhopal claimants to sue the company in India, where the disaster happened but where personal injury judgments run to a fraction of their level in the United States, is scheduled for today before U.S. District Judge John F. Keenan in New York. Plaintiffs argue that the company had practical control over its Indian subsidiary, the nominal owner of the Bhopal plant, and thus the claims should be heard in the U.S.
Lawyers for the government of India and for individual claimants have hinted that they might move to enjoin asset sales of the kind contemplated by GAF and proposed by Union Carbide. But a Carbide source said the restructuring was designed to retain sufficient value in the company to meet any claims.
Among the major elements of the company’s program are these:
- The repurchase of 38.8 million shares for $20 in cash and securities with a stated value of $65. This is an enlargement of the company’s initial repurchase offer, instituted in response to the GAF bid, for more than 23 million shares. Because 56.7 million shares had been tendered by the repurchase deadline of midnight Dec. 31, Union Carbide will buy 68.4% of the tendered shares, or about 55% of the total outstanding.
- The sale of its consumer products business, which produced profits of $226 million on sales of $1.9 billion in 1984 and which has been consistently the company’s first- or second-best business in profit margin and growth. Proceeds of the sale in excess of the business’s $1.1-billion book value will be distributed March 1 to shareholders of record as of Feb. 15--that is, after the share repurchase. (If a sale is not executed by March 1, shareholders will receive a dividend right that may be traded on the market.)
Large Premium
Estimates of the possible sale price vary, but consumer businesses with commanding brand names have been fetching a large premium in the acquisition market over the last year.
“It’s unusual to see these going for less than 20 times net profits, or one times sales,” said an analyst for a major bank with large holdings of Carbide stock. That would place a sale at about $2 billion.
Although Flamm would not cite a target price, he said that the offering documents to be distributed to shareholders will cite the potential dividend returns for a sale ranging from $2 billion to $2.5 billion, or a special dividend ranging from $28 per share to $43. Carbide will absorb any capital-gains tax on the sale, Flamm said, although individual shareholders will have to pay income tax on the dividend.
Selling the labor-intensive consumer business, Flamm added, will pare as many as 25,000 workers from the company’s current work force of about 95,000. Asked whether the financial constraints that it faces after restructuring might force Union Carbide to cut its work force further, he said: “We haven’t even thought that out.”
