Carbide wrestles GAF and the industry wonders, `Who's next?'

The takeover battle between Union Carbide and GAF Corporation resembles a classic Friday night wrestling match. Carbide plays the hulking ($9 billion in sales), reputation-smeared veteran of the chemical industry, fighting for its life. The pipsqueak GAF weighs in at less than one-tenth its size ($730 million in sales). It lands the role of a lean, tenacious adversary bidding for the title.

For the moment, the two foes are feinting with counteroffers and manuevering for an advantage in the courts. The match is tough to call, but the stakes are clear:

If GAF gains control of the Stamford, Conn., concern, about half of Carbide's assets would go on the auction block -- to recoup the cost of the $4.12 billion cash offer. Also, GAF chairman Samuel J. Heyman, noted for penny-pinching, is likely to cut jobs at Carbide. GAF may siphon off the $500 million surplus in Union Carbide's pension fund, too.

This fray could bring the Bhopal settlement to a head. Carbide faces lawsuits totaling as much as $50 billion from the toxic leak at an Indian pesticide plant, which killed an estimated 2,000 people just over a year ago.

If Heyman is victorious, he probably won't waste any time resolving the settlement dispute. Initially GAF's run at Carbide brought fresh vigor to Carbide's negotiation efforts with Bhopal plaintiffs. But a meeting Friday with Indian attorneys ended abruptly, reportedly with no progress made.

Early in January the courts will decide whether the Bhopal suits will be tried here or in India. If the trial takes place here, the $7.5 billion in assets of the parent company may be exposed to litigation. As that court date draws near, analysts say, Carbide may renew its negotiation efforts.

At this point, estimates for an overall out-of-court Bhopal settlement run from $400 million to $1 billion.

GAF's chairman stands to make an estimated $20 million personal paper profit -- if Union Carbide were to buy back the 10 percent stake GAF has in it. But Heyman says he's not interested in a greenmail deal. Analysts note that Heyman is not apt to shy away from this fight. He wrested control of GAF from its founder in a bitter, drawn-out battle.

For Union Carbide's managers, their jobs and the company's independence are on the line. But the price of independence, if won, will be high.

Carbide has countered GAF's $68 a share cash bid by offering shareholders an $85 package, consisting of $20 cash and debt securities that Carbide values at $65. The Carbide ``poison pill,'' designed to make the company unpalatable to GAF by loading Carbide with debt, is for 35 percent of its stock. GAF is excluded from the offer. If GAF does manage to accumulate a 30 percent stake in Carbide, that would trigger a second $85 per share offer from Carbide to buy another 35 percent of its shares.

Even if GAF is put off by the poison pill, the billions in new debt would force Carbide management to make staff and operational cuts similar to the ones expected from Heyman. But Carbide might move more slowly.

For the ringside stockholders, mostly institutions, this is not an easy fight to call.

At this writing, it is rumored GAF will raise the ante to about $75 per share. Already, speculation has pushed Union Carbide's stock well above the initial $68 bid. Analysts figure Union Carbide is worth anywhere from $75 to $110 per share. ``GAF will have to raise their bid,'' says Value Line's chemical analyst, William Acheson. The $85 Carbide counteroffer emphasizes this point. But that Carbide offer is ``inadequate to fend off GAF,'' believes Richard O'Reilly, an analyst at Standard & Poor's. Espe cially with the Bhopal suits unresolved, the value of Carbide's securities poses ``a big question mark,'' adds Acheson.

With the outcome so uncertain, analysts consider this a high-risk investment. Both Carbide and GAF stock have risen more than 100 percent in the last year, so the prevailing recommendation to conservative investors is to take those profits now, if you haven't already.

And what about the ripple effect? Whenever a merger or takeover of this size catches an industry leader, investors wonder, ``Who's next?''

``Monsanto'' springs from brokerage analysts lips most readily, but with a lot of hedging. ``Monsanto is significantly underpriced, if you look at cash flow. But the cash flow comes from only three products -- Aspartame, Roundup, and Lasso -- rather than an array of products,'' says Leslie Ravitz, chemical analyst at Salomon Brothers. He notes that Monsanto leans heavily on agriculture for its sales, and the outlook for the farm economy remains sluggish.

Also, paying off the $2.7 billion purchase price for G. D. Searle is a drain on Monsanto profits. And the recent Searle acquisition has an unquantified liability: several lawsuits stemming from the Copper 7 interuterine device.

As a result, Monsanto stock has vastly underperformed the market. And as Union Carbide management can atest, a weak price can be tempting to a suitor.

Beyond Monsanto, the chemical industry should show marked earnings improvement in 1986 -- after two difficult years. Du Pont's chief economist, Charles Reeder, and Mr. O'Reilly at Standard & Poor's both predict a 20 percent hike in industry profits.

A more than 20 percent drop in the value of the dollar since March, for instance, will spiff up foreign currency earnings. Roughly one-third of the major chemical companies' sales are made abroad. But recovering lost market share from the Saudis and other low-cost foreign competitors won't happen overnight.

Still, falling oil prices will provide a two-pronged boost: reduced raw material costs and lower fuel costs for factory production. And chemical companies are cyclical -- very sensitive to the ups and downs of the economy. So with today's low inventory levels, even a moderate upturn in 1986 will be beneficial. Any pickup in housing starts, for instance, increases the demand for chemical products such as paint, carpets, plastic flooring, and countertops. Textile and semiconductor makers are also chemica l customers with a brightening outlook.

Finally, many of the firms have gone through massive restructuring programs throughout 1985. Unprofitable, inefficient plants have been sold or closed. Chemicalmakers are cutting back on personnel (Du Pont by 10 percent, Monsanto by 2,500, Union Carbide by 4,000), and most have instituted stock buyback programs.

While these large write-offs are hurting earnings now, investors anticipating better returns in 1986 have snapped up chemical stocks. Since April, chemical stocks have outperformed the broader market averages. The group is up about 75 percent vs. a 26 percent hike in the S&P 500. Of course, the meteoric rise of Union Carbide and GAF has fattened the average.

Analysts are split over whether the chemical stocks will continue to outperform the market, since many issues are trading near 52-week highs.

Most companies ``will do well to keep pace with the market averages in the coming six to 12 months,'' according to a recent issue of Value Line.

But Mr. O'Reilly at Standard & Poor's, who correctly called the 1985 rise, says chemicals will still outrun the market. ``Historically, in major bull markets -- which we believe will continue next year -- chemical stocks outperform the broad indexes.''