AVON LAKE, OHIO (Updated Oct. 24, 4:35 p.m. ET) — Polymer compounder and distributor PolyOne Corp. plans to expand its product portfolio by acquiring Spartech Corp., the firms announced early Oct. 24.

Spartech has a presence in aerospace and security markets, ones in which PolyOne wants to expand, PolyOne executives said in a conference call discussing the deal Oct. 24. Spartech’s aerospace and security markets are wedded to its cast acrylic and PVC multilayer sheet operations for applications such as aircraft windows and canopies, bullet-resistant armor for banks, and aircraft interior components. These operations, however, are small compared with Spartech’s predominant commodity sheet business.

PolyOne is intent in turning more Spartech businesses into higher value added operations. PolyOne itself has made the transformation into a specialties-intensive business and it wants to turn Spartech into such a business as well, PolyOne Chairman, President and CEO Stephen D. Newlin, told analysts.

“The old PolyOne transformed from a commodities player to a specialty company,” Newlin explained. “Spartech resembles the PolyOne of the past being under-represented in specialties. We see in Spartech the same opportunities to a value-generated turnaround."

Clayton, Mo.-based Spartech brings a leading North American market position in sheet, rigid barrier packaging, compounds and specialty cast acrylic technologies to PolyOne. Leveraging those strengths with PolyOne’s will accelerate growth for both companies, Newlin claimed.

Spartech is a leader in innovation but is not realizing its full potential, according to Newlin.

“Spartech has pent-up potential,” Newlin said. “We will accelerate its transformation.”

Spartech President and CEO Vicki Holt said in Spartech’s conference call Oct. 24 that the two companies have complementary growth strategies, shifting to a higher margin product mix. Spartech has strived to achieve this as a strategic focus and the PolyOne acquisition “allows us to accelerate the transformation” Holt told analysts.

An analyst said it should be easier for Spartech to make costly decisions on transformation as part of a larger company.

“Spartech is relatively small,” said Phil Karig, managing director at Mathelin Bay Associates consulting firm in St. Louis, Mo. “If [Spartech] tries to take charges on lower-value businesses the charges would weigh more heavily on them than in a bigger company.”

“It’s difficult to build on the specialty side when so much is commodity related,” Karig explained. It would be costly to pay big bucks for a specialty business and sell a lower value commodity business, he added.

Avon Lake-based PolyOne said the deal would be a bolt-on acquisition with opportunity for global expansion and allow the firm to align capacity and cost structure with customers. Spartech is North America-focused and PolyOne can boost its presence on the world stage.

“The transaction is valued at about $393 million, including assumption of Spartech’s net debt of $142 million. The deal includes $2.67 in cash and 0.3167 shares of PolyOne stock for each share of Spartech stock. The proposed transaction represents a premium of 56 percent on Spartech’s stock value on Oct. 23 2012.

One law firm said it is investigating the PolyOne/Spartech deal to see whether the purchase price is too low. Tripp Levy PLLC of New York said Oct. 24 it is trying to determine if Spartech’s board held out for the highest price possible for shareholders while not allowing themselves and Spartech management to obtain personal benefits for themselves to enter into the transaction.

Holt said the deal should lead to $65 million in annual savings through synergies by the third year of the acquisition. Spartech officials said synergies will be apparent quickly through reduced overhead and less cost by listing only one company on stock exchanges. Adjusting manufacturing capacity and sharing marketing also will improve efficiencies. PolyOne will institute Six Sigma practices within Spartech, an exercise PolyOne has already gone through.

The companies expect to complete the deal in the first quarter of 2013.

Earlier this year, at an investor’s day event in New York, PolyOne said its goal is to have sales of $5 billion and adjusted earnings per share of at least $2.50 by 2015. The sales goal is more than 70 percent higher than the $2.9 billion total posted by PolyOne last year. The adjusted earnings-per-share target is more than double last year’s $1.02.

In the Oct. 24 conference call, PolyOne reported a third-quarter record profit of 33 cents per share, up from 26 cents a year earlier. Sales in the third quarter were $740.2 million, up from $735.8 million. Officials said weak demand in Europe was offset by a higher margin product mix and the acquisition of the ColorMatrix Corp. business in 2011.

“We ended the quarter with $249 million of cash as a result of excellent working capital management,” noted PolyOne Chief Financial Officer Richard J. Diemer in a news release. “This, coupled with $179 million of availability under our asset-based revolver, leaves us with ample liquidity to fund future growth initiatives and provide returns to shareholders through dividends and share buybacks.”

PolyOne is the largest compounder in North America, according to Plastics News estimates, with an estimated market share in the region of 10-11 percent. PN estimated the regional market in 2010 at $9.7 billion.

Spartech is the ninth largest film & sheet manufacturer in North America, according to Plastics News’ most recent survey, with estimated relevant sales of $750 million. In total, Spartech said its annual sales are about $1.2 billion. Its compounding business encompasses polymers and concentrates.

The Spartech deal is different from PolyOne’s purchase of ColorMatrix in 2011, Newlin explained. Unlike Spartech, ColorMatrix was already heavily weighted to specialties. Newlin said ColorMatrix, a producer of liquid additives, colors and fluoropolymers could integrate with Spartech by supplying additives to Spartech’s sheet production.

Bank of America Merrill Lynch, Moelis & Co. and KeyBanc Capital Markets acted as financial advisors to PolyOne in the agreement approved by the boards of both companies. Spartech’s financial advisor was Barclays.