Union Carbide Corp. yesterday announced a stock purchase plan intended to defeat a hostile takeover bid by GAF Corp. by saddling Carbide with a crippling load of debt if GAF does not back down.
The Carbide defense described by Chairman Warren Anderson in an interview yesterday is a two-stage stock purchase proposal.
Carbide will offer to purchase 35 percent of its outstanding common stock for a combination of cash and securities that its investment advisers value at $85 a share. That is well above GAF's takeover offer of $68 a share and Carbide's recent market price of more than $60 a share.
If GAF did not take advantage of this offer and acquired more than 30 percent of Carbide's stock, the second stage of the defense plan would be triggered, Anderson said. That would be an offer by Carbide to purchase another 35 percent of outstanding stock at the $85 price.
Each stage would add $2 billion in debt on Carbide's books, and if the second-stage offer were activated, Carbide's debt would soar to about 90 percent of its total shareholder equity.
Details of the Carbide defense plan will be issued today.
GAF last night pledged to "press forward with our offer to a successful conclusion." The Associated Press reported that GAF issued a statement in which it said, "We are shocked and surprised by Union Carbide's announcement, which is nothing but a transparent attempt to prevent Union Carbide shareholders from realizing the full potential of their investments from GAF's all-cash offer for their stock."
Under the second stage of the plan, Carbide would buy back the majority of its outstanding stock, leaving GAF as the controlling shareholder. Carbide thus would be forcing GAF to liquidate the larger company to pay off shareholders. The move also would prevent GAF from using any of the liquidation proceeds to pay off its own debt incurred in the bid for Carbide.
GAF would be faced with a liquidation of Carbide's businesses to reduce both the debt on Carbide's books and the $4 billion it hopes to borrow to mount its takeover campaign.
The second stage of Carbide's new defense plan includes legal language that would obligate funds from the sale of Carbide operations to be used to reduce the new debt issued to the Carbide shareholders who offered their shares to the company.
GAF has said that it intends to sell some of Carbide's prime businesses, including consumer products, to repay some of the debt it will take on if its takeover attempt succeeds. If GAF gained control of Carbide, it also would inherit any liabilities that Carbide may face from the billions of dollars in claims resulting from the poison-gas disaster in Bhopal, India, last year.
"GAF has a decision to make," Anderson said. "Whether they respond to our offer or elect to do something different . . . our shareholders will benefit."
The Carbide board, while authorizing other possible defense moves, did not approve an attempt by Carbide to acquire the much-smaller GAF.
Anderson said he hopes that GAF will join other shareholders in accepting the first-stage offer of $85 in cash and securities.
In that event, the takeover attempt would be ended, and Carbide's current management would retain control of the company.
The addition of $2 billion in debt would bring its debt-equity ratio to about 50 percent, Anderson said.
However, that would not be an insurmountable burden for the company, he said, because it expects its cash flow to improve substantially next year thanks to a series of cost-cutting steps Carbide has taken. Those include work-force reductions and the sale of some of its operations.
Anderson said these cost-reduction steps were part of a restructuring program intended to improve the value of the company to its shareholders.
"We are way ahead of schedule, but that has not been recognized in the marketplace," Anderson said.
"What GAF sees in this is an opportunity to buy cheaply . . . the enormous value that's inherent in Carbide."