ElkCorp (NYSE:ELK) became a merger target today after Samuel J. Heyman/Building Materials Corporation of America disclosed a 10.36% stake in the company and indicated that it was interested in pursuing a business combination with the company, in a 13D filing with the SEC. In response to the interest, ElkCorp announced that they would review their strategic alertnatives, which may include a possible merger or sale of the company. Moreover, the company noted that there were several third parties that had interest in the company.

According to the attached letter:

“As we advised you last week and again on our Sunday conference call, we have a strong interest in pursuing a business combination with Elk at an all cash price to be negotiated.  We believe that a combination of our two companies provides Elk shareholders with the opportunity to realize full value for their shares because of the unique synergies that exist between our two businesses which are an excellent fit for each other.  For this same reason, the combination will provide significant benefits to Elk customers and employees.

As you know, in addition to the extremely difficult operating environment we in the roofing industry now confront - resulting from unprecedented asphalt costs, margin erosion, and excess inventories - the industry faces significant long-term challenges as well.  It is now readily apparent that, in the last few years, aberrational demand from weather-related events temporarily obscured the impact of higher costs and slowing industry growth, especially in the maturing market for laminated shingles.  In our view, consolidation is the only logical response to these conditions.

We have always held Elk and its employees in the highest regard, having known each other as competitors, suppliers, and friends.  In recent months, we have carefully studied this combination and believe that Elk and BMCA are uniquely complementary.  The limited overlap among customers and distribution channels, as well as the geographic fit of our companies’ respective facilities, offer an opportunity to enhance the combined company’s competitive position by achieving economies of scale and improving our ability to respond to customer needs to a degree that would not be available to either company on a stand-alone basis or with any other partner.

As a combined company, we would lead the industry as the lowest-cost roofing manufacturer in the country, able to deliver product quickly and efficiently to customers in every section of the country.  Our customers would also benefit from access to the most comprehensive product offering in roofing, the industry’s oldest and most developed contractor programs, and two of the industry’s most trusted and respected brand names.  Finally, bringing together our companies’ world-class employees, who have driven exceptional innovation and strong historical.

We have invested a significant amount of time and money in the evaluation of a transaction between our companies.  Since our companies have known each other for many years, we are quite familiar with your business, as we know that you are with ours.  With your cooperation, after conducting reasonable confirmatory due diligence, we expect to be in a position to promptly provide an appropriate offer to you and your shareholders.  As discussed on our conference call, we are willing, of course, to execute a customary confidentiality agreement.  In addition, you should know that as a result of our discussions with lenders, we are confident that satisfactory financing for the transaction is readily available and our offer will not be subject to a financing contingency.” (Read More)

Clearly there is a good case for the merger between these two companies, as evidenced in this letter. With several other possible bidders at the table, this could turn into a bidding war, which could mean significant share appreciation even after the stock’s 25% move in morning trading today. Even after the large move, the stock still trades below enterprise value with a forward PE of just 12x earnings. Moreover, the company is still trading down 24% on the year, meaning most investors are likely still underwater on their investment and may require a higher premium to be bought out. Either way, this company is a great one to keep an eye on as this situation unfolds.

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