The Short Short Version
If you buy 99 shares of PPG today and ask your broker to exchange them for GGC shares, you will probably make about $1-2 k within the next few days.
The Short Version
PPG Industries, Inc. (PPG) is simplifying its company by merging one of its units into Georgia Gulf (GGC). Here is what you need to know in order to exploit a profitable opportunity over the next few days: PPG holders have the option to exchange their shares for GGC. For every dollar of PPG, you will receive about $1.11 of GGC (subject to a formula that can be found in recent SEC filings, on PPG's website, or in the links at the end of this note).
GGC is a smaller company and there are not enough shares to go around for everyone who might choose to exchange their PPG shares. In order to deal with this potential issue, PPG shareholders with 100 shares or more will be prorated. If everyone at PPG wants to participate, you could get as little as 7% of your PPG shares exchanged. Opinions differ on how many GGC shares one will get, but it will not be clear until next week how many of the discounted GGC shares you will receive.
For every $10 million of PPG, I would elect to exchange 100%. As little as $700 k will be exchanged in the worst case, but this will be at an attractive discount. My prediction, for what it is worth, is that we will end up receiving twice that amount or more due to the fact that many PPG shareholders will not participate in this exchange offer.
Further adding to the benefit of this investment is my belief that the GGC shares are significantly undervalued by the market. This is a cheap stock for a company that will be a good way to participate in a housing recovery over the coming decade. We have liked this investment idea for years and were gratified to see multiple strategic buyers line up to try to buy it last year. GGC still has a lot to prove in that they pursued this deal with PPG instead of selling in a simpler transaction. GGC's management appears to believe that their company is worth much more than the offers that they received. We agree. Our valuation of GGC is above $60 and we anticipate that the market will recognize that value within the coming year or two.
For a quick word on housing, we are starting to see the inverse of many of the demographic trends that drove our bearishness on housing five years ago. Then, there was a huge glut in the amount of available housing relative to potential household formation. Today, there is a shortage which could drive up housing over the coming years.
The goal is to get one's hands on GGC at a discount. If you own fewer than 100 PPG shares, they will not prorate your election. One can purchase 99 shares of PPG. Immediately - as in today - communicate your instructions to your broker to exchange these shares for GGC. You should receive about $1,500 more worth of GGC shares than what you paid; keep them as an investment or sell them on the open market as per your preference. This whole process will be completed early next week.
The Long Version
PPG Commences Split-off Exchange Offer for Commodity Chemicals Business
Here is the gem in the prospectus:
Beneficial holders of less than 100 shares of PPG common stock who validly tender all of their shares may elect not to be subject to proration by completing the box in the applicable letter of transmittal entitled "Odd-Lot Shares." If your odd-lot shares are held by a broker for your account, you can contact the broker and request this preferential treatment. All of your odd-lot shares will be accepted for exchange without proration if PPG completes this exchange offer.
Disclosure: I am long PPG, GGC.
Additional disclosure: We’ve had no problem at any of the brokers that we use in terms of executing this exchange but: buyer beware, do your own homework, blah blah blah just like always.