"U.S. Chlorine Plants in January Run at Highest Rate Since August"

Bloomberg article.

Time to Unwind the Georgia Gulf (GGC) and Olin (OLN) Pair Trade

The Credit Bubble Stocks pair trade of GGC and OLN was posted at prices of $29 and $16.5, respectively. GGC has fallen to $15.65 and OLN to $15.79 as of right now, which were declines of 46% in the short and only 4% in the long. The pair worked brilliantly.

GGC's performance and adjusted EBITDA was better than I expected. Here are my thoughts on valuation.

I sold out all of my OLN and have covered about half of my GGC short. Normally, I would want to capture the additional downside that I foresee on GGC. However, I am being charged an enormous amount to borrow the stock.

I would not have covered if the huge spike rally at the open had continued all day, and I will probably reshort if it hits those levels again.

Watch Out for Georgia Gulf (GGC) Earnings Tomorrow

After the big selloff on Friday when the registration statement for 30 million new Georgia Gulf (GGC) shares was approved, trading has slowed down, and the stock is hovering around 15.

It seems like some of the bond funds haven't decided to sell their new shares yet. But I see two catalysts for another sharp move lower in the stock.

First, GGC will be releasing third quarter earnings tomorrow at 5:00 PM ET. Competitors PPG and OLN both announced disappointing chlor-alkali results. I don't see how GGC could have done better. I do not expect GGC to meet management's 2009 EBITDA target, which would make it a stretch for GGC equity to be worth anything.

Second, I wouldn't be surprised if GGC attempts to issue stock. Raising equity at these prices and de-leveraging the company would make great financial sense. There are ~$40 million of the subordinated notes outstanding which they could buy at 15-20% yields.

Good News: Olin Corp Earnings Report is Perfect for Our Pair Trade with Georgia Gulf

Olin Corp (OLN) just put out their third quarter earnings press release. The results are perfect for our long-Olin / short-Georgia Gulf (GGC) pair trade.

Olin has two segments: Chlor-Alkali chemicals and Winchester ammunition.

GGC has two segments: Chlor-Alkali chemicals and Royal Group vinyl products.

I am short more GGC than I am long OLN. So, what I would ideally want is for Winchester to do really well, and Chlor-Alkali (CA) to do really poorly. And that is exactly what is happening!

At Olin, third quarter CA segment income dropped from $104 million last year to $3.9 million this year. But the Winchester segment's third quarter income increased from $9.8 million last year to $23.0 million this year.

The result is that, despite the terrible overcapacity and slump in the CA industry, Olin held its own. The stock is up a buck after hours. Olin's year-to-date 2009 EBITDA is 229.8, which is about 300 annualized. Maybe less given seasonality. But the EV/EBITDA multiple is still around 4.5.

At that multiple, and assuming that GGC hits their 2009 guidance (a stretch, given what we have seen with PPG and OLN), GGC equity has a negative value.

There are a ton of new people coming here from the Google Finance pages about Georgia Gulf and Olin. If you want to catch up, here are all of the GGC posts and all of the OLN posts from Credit Bubble Stocks. You might also like the Regency Centers pair trade.

Georgia Gulf (GGC) Getting Battered

GGC down 11% today. Might see it below $18 by the close.

OLN down only about 2%.

OLN earnings report after hours today. I'll post about it tonight...

Chemical Industry Watch: Georgia Gulf (GGC), Olin (OLN) and PPG Industries (PPG)

Georgia Gulf Corporation (GGC) will be releasing Q3 financial results on Wednesday, November 4, 2009 at 5:00 p.m. ET, with a conference call the next morning at 10:00 a.m. ET. Olin (OLN) announces earnings this Monday with a conference call on Tuesday.

The pair trade has been doing well. Since Oct 2, GGC is down 29% and OLN is down only 5%. I bought more OLN after the big dive it took today, having already shorted more GGC earlier this week.

I will be very curious to see the earnings results.

Competitor PPG Industries had their Q3 conference call last week. They were weighed down by their commodity chemicals operations (the segment that competes with GGC and OLN), which suffered a 43% y-o-y decrease in sales (page 7 of investor presentation). This was the result of big price and volume declines. Year to date chemicals sales were down 32%, meaning that the commodity chemicals decline picked up in the third quarter (segment sales comparisons).

On the conference call, PPG said that they do see the electrochemical unit (ECU) pricing improving a bit so far during the fourth quarter.

GGC also amended their registration statement again. This is the fourth amendment - they already amended it two days ago. Previously I speculated that their motive for these amendments was to stall the SEC from making the registration statement effective. However, I notice that this statement has an opinion from law firm Jones Day dated yesterday (Oct 22) regarding the validity of the new shares. So maybe they were just waiting for that?

I may make the chemical industry a focus area of investing - I am planning to go through a pile of chemical industry books when I get the chance.

Update on Georgia Gulf (GGC) and Olin (OLN) Pair Trade

GGC is now down 23% and OLN down less than 1% since I recommended the pair trade of short GGC and long OLN.

GGC has been falling on higher volume days, although the volume pales in comparison to the number of shares the bond funds would probably like to sell.

There has been no news on GGC - presumably just selling pressure from the new holders is moving the price.

Georgia Gulf (GGC) Closes Down 8.5%

All it took was some blocks of 10,000-20,000 shares, with total volume of only 200k.

Digging through management's Q2 earnings presentation, I find that my capital structure/enterprise value calculation for GGC did not include $14.9 million in other long term debt plus a Lease Financing Obligation of $96.3 million.

That extra burden moves my GGC equity valuation target down to $0. I am shorting with impunity since I own OLN and GGC bonds as a hedge.

If the new shareholders' selling does not take the price down, or if they don't sell, I would expect the company to issue reams of equity. It would be good to continue de-leveraging.

This is It?

Georgia Gulf (GGC) down $2.23 (8.37%) on bigger volume today, although only 100,000 shares so far today. Wait until someone goes to sell a million!

This pair trade has worked fantastically. GGC is down 13% and OLN is up 4% since my report.

Georgia Gulf Corp (GGC) and Olin Corp (OLN) Pair Trade Idea

I have been meaning to post about this for months; here it is.

An extensive restructuring of Georgia Gulf Corporation (GGC $29) involving a distressed debt exchange, convertible preferred stock issuance, and a 25:1 reverse split has caused confusion and led to a huge mispricing of GGC equity. Enterprise value for GGC is 14x management’s estimated 2009 EBITDA versus ~5x for its closest competitor Olin Corp (OLN $16.50).

GGC is an Atlanta-based manufacturer of commodity chemicals and vinyl-based building and home improvement products.[1] The company operates in four segments, Chlorovinyls; Window and Door Profiles and Moldings Products; Outdoor Building Products; and Aromatics. It markets its vinyl-based building and home improvement products under the Royal Group brands.

In October 2006, GGC vertically integrated by buying Royal Group, a downstream consumer of chlorovinyls, for $1.6 billion, “transforming Georgia Gulf Corporation into one of the most highly-integrated companies in the residential repair, renovation, and remodeling markets.” The 2005 EBITDA for Royal Group was $224 million for a transaction multiple of 7.1x. This transaction was nearly the ruin of the company as the outdoor building products and window and door profiles and moldings products segments of the company have been performing worse than the commodity chemicals segments, and even had negative gross margins in the most recent quarter.

Olin Corporation is also a commodity Chlor-Alkali chemicals manufacturer, which represents 72% of 2008 sales, with the balance (28%) consisting of the fantastic Winchester ammunition business. This is a much better subsidiary to own than the vinyl-siding Royal Group. For one thing, ammunition is a nice oligopoly with almost all production owned by Olin, Alliant Techsystems (ATK), or Cerberus Capital Management (private). [2]

Also, OLN is better managed than GGC, judging by their decision to sell a subsidiary (Metals) to a New York private equity firm in 2007. (On the other hand, they did buy chemicals competitor Pioneer in 2007.)

What I like about this trade is that on their own, OLN is a good long, GGC is a great short, but they are so comparable that they also pair together well.

GGC Capital Structure
A key factor causing the current mispricing of GGC is confusion over its capital structure, thanks to the restructuring and reverse split. The current enterprise valuation is outlined below.


Only a small amount of the notes remain because 92% of them were tendered in July in exchange for stock. Note that Yahoo Finance and other data providers are wrong about the market cap and enterprise value of GGC. The structure I show here is derived from a recent 8-K.

Relative Valuation
GGC has a higher enterprise value than OLN, but lower gross profit, EBITDA, and cash flow. Additionally, OLN has a long history of paying dividends, and currently yields 4.9%.



GGC Valuation
Management has estimated that 2009 EBITDA for GGC will be $110 million. Stretching as far as a 8x multiple would leave only $347 million in value for common shareholders, putting the share price at $9.95, a 66% downside from today's levels. The table below shows value/share available given a number of possible EBITDA multiples. Note that the common GGC shares are a zero if the enterprise is valued based on OLN's current multiple.


GGC Recovery Analysis
Another interesting question is: where should the notes trade? This question is basically ignored by the market given that there are only $64 million notes outstanding now that the the exchange has been completed.

Given the current $986 million market cap of GGC, it is odd for the sub debt to be trading at 63, to yield over 20%. If the current equity pricing persists, I would expect the company to make a huge equity issuance and buy back debt. All of the notes have double-digit yields. They would probably find them the best ROI in the chemical industry right now.



The Trade
I like shorting GGC and buying OLN as a hedge. Also I like GGC debt as a hedge.

Notes
[1] Chlor Alkali refers to combination of chlorine (Cl) and caustic soda (NaOH), which are co-produced by the electrolysis of salt (NaCl). These co-products are produced simultaneously in a fixed ratio of 1 ton of chlorine to 1.1 tons of caustic soda. The industry refers to this as an Electrochemical Unit or ECU. As of YE 2008, OLN had a consolidated capacity of 1.91 million ECUs per year, making them the third largest chlor alkali producer.

[2] Olin, by virtue of its Winchester subsidiary, is the most attractive way to gain exposure to ammunition manufacturing. Remington is privately owned by hedge fund Cerberus. Alliant Techsystems, which owns the Federal and CCI/Spear brands, is not as attractively priced.

Obligatory Trading Ideas

This is a trading blog not an audit the fed blog, so I put these ideas to you for this week:

I will be looking to buy GGC puts in size. I like OLN and OLN debt. REG needs a 50% haircut.