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Planned Spin-Off Widens PPG Industries' Moat

As the company divests itself of its capital-intensive commodity chemical business, its sales mix will shift in the right direction.

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We have believed that a continued shift toward specialty coatings and optical products would improve  PPG Industries' (PPG) profitability and lower its capital intensity, giving the firm a better chance to consistently produce returns on invested capital that outpace its weighted average cost of capital. Recently, PPG took a big step in this direction with the proposed spin-off of its commodity chemical business to Georgia Gulf. After the transaction is complete, we estimate more than two thirds of PPG's sales will be generated by specialty coatings, optical, and material products--businesses characterized by close customer relationships. This has resulted in our awarding PPG a narrow economic moat rating.

Good Time to Say Goodbye to Chlor-Alkali
In a structure used for tax efficiency, PPG's commodity chemical business will be spun off to PPG shareholders and then immediately merged with Georgia Gulf. The deal, which is expected to close in late 2012 or early 2013, will remove capital-intensive chlor-alkali production from PPG's books, and we think PPG and its shareholders are receiving a reasonable value for the business.

Jeffrey Stafford does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.