Management of AFG Industries announced plans Thursday to take the Irvine glass-making giant private in an $883-million tender offer that some major shareholders characterized as too low.
The proposed buyout would be accomplished by a separate company created by R.D. Hubbard, 52, the AFG chairman known for his flamboyant takeover plays, as well as his success in building AFG into the nation's No. 2 flat-glass manufacturer.
Although Hubbard's $33-per-share offer represents a premium of more than 30% over recent trading prices for AFG stock, several large institutional investors said Thursday that they are reluctant to tender their shares.
"We'll need to take a closer look at the offer, but it seems disappointing, and we'd rather just keep the stock," said Susan Byrne, president of Westwood Management in New York. Westwood, which owns more than 400,000 shares of AFG, is one of the company's largest institutional shareholders.
"The management is very talented, specifically Mr. Hubbard," Byrne said. "We think the company is worth more than that. AFG's prospects for future growth are very exciting."
Although AFG officials were unavailable for comment, analysts speculated that Hubbard wants to take the company private because he can buy it at a bargain price and safeguard it from outside attack at the same time.
AFG was formed in 1978, when Hubbard combined two nearly bankrupt firms--private Fourco Glass Co. and publicly held ASG Industries. The company now commands an estimated 20% of the domestic glass market.
"Essentially, the company built its position by emphasizing the higher-margin areas of the glass business where they could be the No. 1 or No. 2 supplier, such as appliance glass and shower-door glass," said Debra Davis, a company spokeswoman.
AFG said it will launch a cash tender offer no later than Wednesday for up to 26.8 million shares of its common stock, or about 94% of the total outstanding. The offer, which has been approved by AFG's board, is subject to a minimum of 21.8 million shares being tendered.
Upon completion of the offer, remaining AFG shares would be exchanged for preferred stock or a combination of cash and preferred stock.
Financing for the acquisition is to be provided by Drexel Burnham Lambert, which has agreed to sell high-yield bonds to private institutions, according to Steven Anreder, a Drexel spokesman.
Analysts said Hubbard's buyout group probably will have to increase the offer above $33.
"I am advising my clients to wait and see if they make a better offer. I don't know anybody who makes the best offer the first time around," said Larry Selwitz, an analyst with Bateman Eichler, Hill Richards, a Los Angeles brokerage.
Selwitz said a more reasonable offer would fall in a range of $35 to $40 a share, based on expectations that "this is going to be just one dynamite year" for AFG.
Selwitz estimated that AFG's sales will rise by 50% this year and that earnings will increase by about 30%. "Those kinds of numbers leave lots of room for appreciation of the share price," he said.
The tender offer announcement caused AFG's stock to jump $5.75 per share Thursday to close at $32.50 per share. The stock was the fourth highest percentage gainer on the New York Stock Exchange, with 1.7 million shares changing hands.
Analysts estimated that the net cost of taking the company private would be close to $750 million because AFG management already owns about 25% of the outstanding shares.
Because AFG's cash flow is strong and its existing debt level is relatively low, analysts said the company should be able to handle the added debt incurred as part of the buyout. As of Dec. 31, AFG had $183 million in long-term debt.
"I have a lot of confidence in R.D. Hubbard," said Deborah P. Rodriguez, an analyst with Lovett Mitchell Webb & Garrison in Houston. "He probably knows what he's doing more than anybody in the glass industry. This was obviously not something he thought up overnight. . . . I think he probably saw that his stock was undervalued and not being recognized adequately."
From 1980 through 1986, AFG achieved an average annual growth rate of 26% for sales and 58% for earnings, said Davis, the company spokeswoman. Return on equity during that period averaged 31%.
Just five weeks ago, AFG reported record 1987 sales and earnings. Sales increased 20% to $488 million, compared to $406 million in 1986. Earnings rose 9% to $58.4 million from $53.3 million the previous year. Hubbard predicted at that time that the company's expansion efforts would produce even more growth during 1988.
Davis said AFG is the only U.S. glass maker with the capability to distribute its own products. It is also the only glass company, she said, that has been actively expanding over the past several years.
AFG acquired a Ford Motor Co. auto glass subsidiary in late 1987 for an undisclosed price, estimated by analysts to range from $100 million to $150 million. It began operating Ford's Canadian plant in January.