GAF Corp., a medium-sized specialty-chemical firm headed by shopping mall developer Samuel J. Heyman, yesterday launched a $4.1 billion bid to take over Union Carbide Corp. -- a deal that GAF proposes to finance through bank loans and high-risk securities known as "junk bonds."
The long-awaited cash tender offer immediately fueled concern on Wall Street about the growing use of junk-bond financing and its impact on the country's financial stability. If successful, GAF will face interest expenses alone of more than $500 million a year -- an amount greater than the two companies' combined 1984 earnings.
The offer also sets the stage for a new and potentially fierce takeover battle, but several financial analysts said yesterday that GAF appears to start out with the upper hand. Although Carbide is more than 10 times the size of its suitor, it may find it difficult to mount a full-fledged defense because of its own internal problems, including billions of dollars in legal claims filed over the poison gas disaster at Bhopal, India, analysts said.
"They don't have any strong [takeover] defense," said Joseph Wilbur, an analyst with Smith Barney, Harris Upham & Co. "And with the problems they have, I'm not so sure the shareholders would be supportive of management if they tried to mount one . . . There's not much you can do to stop an all-cash tender."
GAF first began buying Carbide stock in August and now owns 10 percent of the Danbury, Conn.-based firm. GAF said it plans to make Carbide shareholders a two-step cash offer: It proposed a $3.2 billion tender offer for 48 million common shares of Carbide stock at $68 a share, a bid that would give GAF 80 percent of Carbide. The proposal then calls for a merger between the two companies, after which the company would buy back the remaining 12.6 million shares at the same price.
Carbide's stock was one of the most heavily traded on the New York Stock Exchange yesterday, jumping $3.375 to $66.375 in reaction to the announcement. GAF's stock, meanwhile, soared $10 to $57.625 on speculation that its bid would succeed and result in a big jump in company earnings.
The proposal was described yesterday as the latest in a series of "minnow-swallowing-the-whale" takeover attempts. Once best known for its film and photographic supplies business, GAF has abandoned those fields in recent years and has concentrated on its specialty chemical and building product operations. Heyman, a 47-year-old maverick shopping mall developer from Connecticut, won control of the company in a bloody proxy fight two years ago and immediately began a major restructuring, drastically cutting corporate overhead.
After losing $3.8 million in 1983 under its old management, GAF posted profits of $56.7 million in 1984 on revenue of $731.3 million. Carbide, a petrochemical giant that also makes such well-known consumer products as Everready batteries, Prestone Anti-Freeze and Glad bags, earned $328.3 million on sales of $9.5 billion after taking a charge for costs related to Bhopal.
The most controversial aspect of the deal appears to be its almost complete reliance on potentially risky borrowing. In a letter to Carbide Chairman Warren Anderson that was released publicly, Heyman said GAF has engaged a "major bank" to arrange loans of up to $1.5 billion. The rest of the financing would come from a private sale of junk bonds that would be arranged by GAF's financial adviser, Drexel Burnham Lambert Inc.
The offer comes only a few days after the Federal Reserve Board announced new regulations to take effect Jan. 1 aimed at curbing some junk-bond financing. Some Wall Street analysts said yesterday that GAF's attempt could be the first in a new flurry of junk-bond-financed takeover bids designed to beat the Fed's end-of-the-year deadline.
Heyman also said in his letter to Anderson that GAF would contemplate the sale of "certain Carbide assets" -- a common tactic in takeovers, which gives the new owners cash to pay down the debt burden.
But Heyman said he has no intention of liquidating Carbide and would continue to operate most Carbide businesses. That left some analysts wondering how GAF would finance the heavy debt burden it would be acquiring.
A spokesman said yesterday that Carbide would have no comment other than that it was "aware of the GAF proposal and we will respond at the appropriate time."