Hubbard Given Rave Reviews for Move to Go Private With Irvine-Based AFG

Wall Street analysts are giving AFG Industries Chairman R.D. Hubbard high marks for his move to take the highly profitable glass manufacturer private in a management-led buyout.

“Hubbard should now be able to do a lot of things in the private market that he would not be well rewarded for in the public arena,” said Gerald Odening, an analyst with Shearson Lehman Hutton.

“This is a real clean deal,” said Les Werkstell, an analyst with First Manhattan, a New York brokerage. “It’s a good company with smart management. They can borrow funds easily, and the company has bright prospects. The timing was right.”

Based in Irvine, AFG is the nation’s second-largest manufacturer of flat glass and is a leading producer of specialty glass products. Under Hubbard’s leadership, the company has also reaped substantial profits by participating in hostile takeover bids for other firms.

A management group headed by Hubbard said Thursday that it will venture an $883-million tender offer to acquire up to 94% of AFG’s common stock for $33 a share in cash as part of a two-step transaction to take the company private.

AFG closed Friday at $32.125 per share, up $6.375 for the week. The stock was one of the most active issues on the New York Stock Exchange after the buyout was announced.

Although some large shareholders and analysts said they consider the $33 offer too low, the buyout is expected to be successful. There is no sign that a rival bidder will challenge Hubbard’s offer, and financing for the deal is considered all but in the bag.

Although a competing bid at a higher price is not anticipated, analysts said they are not ruling out the possibility. “More than likely it won’t happen, but it is not inconceivable,” Werkstell said. “Hubbard has put the company in play, and what he is offering is at the low end of the range of what the business is worth.”

Werkstell noted that two years ago, no one expected Dallas-based National Gypsum to become the target of a hostile takeover bid after announcing a similar management buyout offer.

National Gypsum’s management initially offered to take the company private by giving shareholders $41 per share in cash, plus notes with a face value of $17 per share. But Santa Monica-based Wickes Cos. made a surprise $54 all-cash offer that touched off a fierce bidding war. National Gypsum’s management eventually got the company, but it had to pay $72 a share.

One reason that an unfriendly offer is considered unlikely is that without Hubbard, AFG could lose much of its appeal. “There is a general perception that the company would be something less than what it is today without him,” Werkstell said.

Details of the buyout financing have not been released, but the Hubbard group will probably need to float about $730 million in debt. The balance of the buyout costs probably will be paid from the company’s cash reserves, some of which will come from the sale of part of AFG’s recently acquired Canadian operations, said Shearson’s Odening.

Although the deal will turn AFG into a highly leveraged company, it will give Hubbard the freedom to pursue his penchant for high-stakes acquisitions without having to answer to investors for his actions, Odening speculated.

“In a bull market, concerns like quality of earnings and a healthy balance sheet are usually swept aside,” he said. “But in a flat or bear market, the focus shifts back (to those fundamentals),” making it more difficult to take risks.

“AFG has had a lot of debt and had been steadily decreasing it,” Odening said. “To go the other way in a bear market could scare investors. Your stock price could be cut in half.

“In a private company, Hubbard--who has a high degree of confidence--can only bother himself. The kind of growth he may be envisioning may be something less than steady and smooth.”

Werkstell said AFG will have considerably more flexibility as a private company. “Hubbard will be able to be more creative without having to share his strategies with everyone,” he said.

Pursuing further expansion soon after leveraging a company in a buyout transaction is considered unusual, but it is just the sort of strategy that would be in keeping with Hubbard’s entrepreneurial nature. “He’s never been afraid of leverage before,” Odening said.

One possible strategy would be for AFG to buy several small, ailing companies, turn them around, then take the entire company public again at a huge profit.

“At the end of the road there could be a pot of gold,” Odening said.

Not worrying about shareholders is one possible attraction, but going private offers other advantages as well, said Larry Selwitz, an analyst with Bateman Eichler, Hill Richards, a Los Angeles brokerage.

“If you are a highly profitable company, it’s difficult justifying to your customers any price increases,” Selwitz said. As a private company, he said, AFG’s profits will no longer be public knowledge.

Another possible reason for taking the company private is management’s ability to cash in its current AFG holding. According to a proxy statement issued in April, 1987, directors and officers owned about 20% of the company’s stock. But the figure has probably risen to about 25% since then, analysts said.

Hubbard personally owns 13% to 18% of AFG’s stock. At $33 a share, Hubbard would receive $122 million to $169 million from the buyout transaction.

It was not known, however, whether management will reinvest any or all of its buyout proceeds in the newly structured company. That option might be used to reduce the debt incurred as a result of the buyout.