Axiall – Asymmetric Risk Reward

Axiall is either acting on very poor advice or has something up its sleeve. The company’s total and aggressive rejection of the bid from Westlake has opened a wide door for Westlake to walk through with a hostile bid, something the company has acted on this week. Unless Axiall has something else going on, it is our view that Westlake will win and if Axiall really does not have a defense alternative to “we are worth more”, Westlake will likely win at or close to the current offer, which is roughly where AXLL stock is trading today. This sets the floor.

Axiall has closed the door on negotiations and unless Westlake wants to speed things up, there is likely not much point in a higher bid because absent something more concrete from AXLL, Westlake will probably win with its current proposal.

So what could Axiall have?

• Nothing – game over
  • Stock fairly valued today
• More and better rhetoric around why the stock is worth more than the offer
  • We think that this will fall on deaf ears given that offer is almost the equivalent value in stock and effectively a $10 cash dividend
  • Stock fairly valued today
• A better deal!
  • This is the one trump card that Westlake cannot plan for and possibly could not or would not counter
    • A slightly better offer from a more questionable bidder would likely not work
      • WLK will be able to argue that it is a strong US company with good financials
      • WLK will also be able to argue that its deal implies industry consolidation in PVC, something which the industry needs and which is worth something
      • WLK can make the argument that a dollar of WLK earnings is worth more than a dollar of AXLL earnings, particularly over the last three years – chart – and this will likely help maintain investor support for WLK over a marginally better offer
      • Stock might pop on the news but would likely drift back possibly supported by a small bid increase from WLK
    • AXLL needs a strong offer – in excess of $25 per share from a credible bidder and deal terms, with respect to structure and timing that do not counter the premium
      • Stock has 25-30% upside

The downside comes from possible downside in WLK’s share price – either from weaker oil prices or because the correction in polyethylene margins that we have been calling for takes place. We believe that WLK’s share price is discounting some earnings disappointments this year, but would still expect to see further weakness as estimates come down.

The likelihood that AXLL remains independent and WLK walks away – i.e. back to where we were at the beginning of the year – is very close to zero in our view.

In conclusion, we see a situation with very limited downside and the chance of some meaningful upside. However, we would not buy the stock above the price offered by WLK.

Long Axiall – Short Westlake is also a possible play here, but would not work in an environment where crude prices rise quickly as WLK’s leverage to a wide crude – natural gas spread is much greater than AXLL’s.

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