Hicksville, N.Y.—First it was on, then it was off; then it was on again, and now it is once again off. While it sounds like a story line to a daytime soap opera it is really the story of the relationship between Pergo and Witex as the two sides have called off their planned merger. On top of that, Witex AG, a sister company to Witex USA, has filed for Chapter 11 bankruptcy protection in its home country of Germany. This action, officials note, will have no negative impact on the operations of the American unit. While each side paints a slightly different picture as to why the merger is not going through, the basic fact seems to be a matter of financing.

In a press release dated May 20, Pergo stated, “the transaction was postponed since the financing for the new group had not yet been secured in a manner acceptable to the parties.” Steve Newman, president of Witex USA, said, “The two sides had agreed on a merger and had all the necessary approvals by the German authorities, including the banks, but the Swedish banks didn’t agree to the deal.” If it had gone through, the deal, which was first signed in November ( FCNews, Nov. 25/Dec. 2) and announced as done at Surfaces, was between Pergo AB and HW Industries GmbH & Co. Both companies have a stake in Witex AG, with Pergo owning 25.1% of the shares and HW Industries owning the rest. The structure of the deal called for HW Industries to transfer all its shares in Witex to Pergo. As payment, Pergo would then issue new shares to HW Industries, making it the major shareholder in Pergo. In the end, Pergo would still have been a publicly held company on the Stockholm stock exchange with HW Industries being its largest shareholder.

Because of common ownerships and interests, the North American operations of Pergo and Witex would have been included in the merger. Witex AG said part of the reason for its financial troubles lie in Pergo “not working toward a joint solution.” Officials also note that when Pergo bought its 25.1% stake it was supposed to help bring additional capacity to Witex’ manufacturing plant in Augustdorf, Germany and that “has not happened.” For its part, Pergo said “Witex had a weakened financial development in the spring [and] the profitability of Witex has been negatively impacted in the spring, which in combination with high debt has led to a liquidity crisis.” And because the merger is now off, “Pergo’s earnings will be adversely impacted with costs connected to the acquisition process.”

Tony Sturrus, president of Pergo’s North American operations, added the mill will more than likely retain its 25.1% interest in Witex AG “given the state of the company there is probably not a market for it right now. But, I’m sure the board will evaluate all the possibilities.” In a May 27 press release, HW Industries stated “there was and still is great interest in a merger...Nothing has happened to change the basic consideration of the whole negotiations that considerable synergies could be gained by concentrating production in Augustdorf, and combining the sales networks.” Executives from both companies on this side of the Atlantic also expressed their continued interest in a merger. “All along, we’ve seen the merger as a good strategic fit,” Sturrus said, “and wanted to see it come together. And, if the conditions are right, it would still be a good thing.” Newman said he was “disappointed it didn’t happen. If I has my druthers, it would because I was looking forward to all the synergies each side would realize. “I also have a tremendous amount of respect for the executives at Pergo,” he continued. “We had some real good talks after the deal was announced and recognized we have many common goals.” As to what happens now, both sides said as far distributors, retailers and consumers in the U.S. are concerned nothing has changed.

Newman said the bankruptcy of Witex AG really has no affect on the U.S. because “it is one of many sister companies and just one supplier to us. In addition, we operate independently and do not have any legal connection or liability.” In addition to getting its laminate products from the German facility, the American entity also gets them from another sister company that is based in Malaysia. Newman explained that on the overall scheme of things Witex USA and Witex AG are like “fingers” in the HW Industries empire. “HW is a very large entity with lots of companies and financial interests around the world. For example, in the U.S. it has a $100 million investment in an MDF plant, and it is only one of five such facilities HW operates, not to mention its other businesses.” As for the Malaysian facility, “it produces the same exact products as the Augustdorf plant,” he explained, “and we’ve been getting product from Malaysia for the past two years. We’ve been switching capacity from one plant to the other depending on a variety of factors, such as currency exchange rates.”

Also, while the German factory was forced to shut down under German bankruptcy law Newman noted it amounted to only a few days because the company was given permission to start up a week later and there was a national two-day holiday during that period in which the plant would have been closed anyway. “So there was no serious interruption,” he added. “Plus, in addition to the Malaysia plant we have a safety stock in the U.S. so as to ensure there would be no disruption in service to our customers.” One thing the bankruptcy may do, he hopes is, “expedite the manufacturing curve in the U.S. “I would like to get it here quickly, but we’ll have to see what happens.” In recent years, HW Industries and Witex have been formulating plans to build a laminate production plant in the U.S. near its MDF operations, but ground has yet to be broken on such a facility.

As for Pergo, Sturrus said the company is “very solid financially with a 70/30 equity to debt ratio.” In fact, in a May 26 press release, the mill said it has only borrowed 48 million Swedish Krona from its approved credit facilities which total 990 million Swedish Krona. The only area the Witex bankruptcy affects Pergo is in the “immediate access to a sophisticated manufacturing plant in Germany that would allow us to introduce certain new products and technologies. We’ve been looking for alternatives beyond just this one facility anyway. Other than that, it doesn’t affect our marketing strategies. “And, if it emerges successfully then it would still be a vendor to us as it is now,” he added. “We’ll have a much clearer picture in the next seven to 14 days.” Pergo’s direct pressure products come from Witex. —Matthew Spieler