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Deal will put Georgia-Pacific in new hands

$21 BILLION SURPRISE

In a deal that surprised Georgia-Pacific chief executive A.D. "Pete" Correll when it was first proposed to him last month and was just as stunning when publicly disclosed Sunday, Kansas-based Koch Industries will acquire G-P for $21 billion.

The move by privately held Koch will combine the world's largest nylon maker with $60 billion in sales with Georgia's fifth-largest publicly traded company and the maker of well-known consumer products such as Brawny paper towels and Quilted Northern toilet paper.

The $48-per-share offer will pay Georgia-Pacific shareholders a 39 percent premium on their shares, which closed Friday at $34.65. At the same time, it places Atlanta-based G-P, a longtime member of the prestigious Fortune 500, into private hands.

As for Koch, which is headquartered in Wichita, the transaction is the largest in its history and will transform it into the nation's largest private company. It operates in various industries including petroleum, chemicals, fibers and fertilizers, and owns the Lycra and Stainmaster carpet brands.

"We think taking the company private is a tremendous advantage," said Joe Moeller, Koch's president and chief operating officer. "It gives us flexibility to weather market cycles. We believe this purchase is a natural extension of [our] capabilities."

A Koch subsidiary, Koch Forest Products, expects to launch a cash tender offer for Georgia-Pacific's outstanding shares this week. The transaction also requires Koch to assume G-P's debts, which totaled about $8 billion at the beginning of 2005.

Impact on community

What remains unclear is what impact the acquisition will have on Georgia-Pacific's 55,000 employees, including about 10,000 in Georgia and an unknown number in Atlanta. Koch pledged Sunday to keep its new subsidiary's headquarters here, but did not provide additional detail.

"If you're an avid shareholder, you're excited about it," said merger expert Narayanan Jayaraman, a professor of finance at Georgia Tech. "But I'm sure that there are some negative implications for current employees in the long run, as well as the medium run."

Community leaders also are likely to worry about the deal, knowing that Georgia-Pacific has been a long and steady contributor to metro Atlanta. Its CEO, Correll, has been actively involved in key community causes, including the sometimes politically charged effort to honor the late Atlanta mayors Maynard Jackson and Ivan Allen Jr.

For Correll, the deal also signals the end of his tenure as chairman and chief executive of Georgia-Pacific, a post he has held for 12 years. In an interview Sunday, he said he was stunned when the company received Koch's unsolicited offer last month.

"I never imagined it," Correll said. "That was the furthest thing from my mind."

In fact, Correll was in the midst of a management succession at the company when Koch's offer arrived. It wasn't that Koch was a stranger: Executives of the two companies met when G-P sold pulp plants in Brunswick and in New Augusta, Miss., to Koch in May 2004.

'Most dramatic step'

Moeller said Correll, 64, will remain on the board of Georgia-Pacific, which will operate as a wholly owned subsidiary. He also said an unnamed executive with Koch will assume the position as G-P's president and chief executive officer.

"Koch's acquisition will enable us to move into the future in an exciting fashion," Correll said. "This transaction is the most dramatic step yet in Georgia-Pacific's history and its transformation."

Correll also stands to profit from the deal. His most recent filings with the Securities and Exchange Commission show he holds about 400,000 shares of G-P stock, which would yield him a paper profit of about $5 million.

The move also stunned industry experts.

"I'm astonished how this stayed off of everybody's radar screen," said George Manners, a Kennesaw State University business professor and former executive with James River Corp., which later became Fort James Corp. Manners said he wouldn't be surprised to see some unloading of businesses after the transaction closes.

Georgia-Pacific was founded in Augusta in 1927, ultimately transforming itself into a $20 billion company with a huge building and consumer products presence. It began selling shares to the public in 1949, moved to Oregon in 1954, then moved to Atlanta in 1982.

Correll, who became chairman in 1993, was the architect of the company's $11.3 billion acquisition of Fort James in 2000, a deal which gave Georgia-Pacific top shelf brands including Brawny and Quilted Northern. That transaction also marked the company's shift to a major consumer products company.

More recently, Georgia-Pacific began slashing 850 jobs in North America, half of them in its Green Bay, Wis., plant. The company also will cut 250 positions across Europe.

Georgia-Pacific also has been straddled with asbestos lawsuits. In fact, so many were filed that the company began reporting details about the litigation in 2002 and setting aside reserves to cover those liabilities. Its asbestos lawsuits stem from a wall compound made between 1965 and 1977 that contained asbestos, which can cause lung disease and cancer.

New asbestos claims fell 32 percent last year compared to the prior year. Claims payments rose to $200 million in 2004, compared with $189 million in 2003.