PolyOne seeks high-value role for Spartech

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AVON LAKE, OHIO (Updated Nov. 5, 12:15 p.m. ET) — Compounding leader PolyOne Corp. is making a big move into downstream plastic products by acquiring sheet production leader Spartech Corp. for almost $400 million.

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 Oct. 23.

A combined PolyOne-Spartech would have annual sales of about $4 billion, based on 2011 totals, and would employ about 7,200 at 90 manufacturing and distribution sites worldwide.

Spartech has a presence in aerospace and security markets, ones in which PolyOne wants to expand, PolyOne executives said in an Oct. 24 conference call discussing the deal.

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.

Avon Lake-based PolyOne is intent on 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 Clayton, Mo.-based Spartech into such a business as well, PolyOne Chairman, President and CEO Stephen Newlin, told analysts.

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

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 said.

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 generates about 25 percent of its sales from its color and specialty compounds unit. A PolyOne spokesman said there is “very minimal overlap” between that business and PolyOne’s own compounding efforts.

The deal is PolyOne’s third major acquisition in the last five years. The firm bought specialty compounder GLS Corp. for an undisclosed price in 2007, then last year purchased liquid-color maker ColorMatrix Inc. in a deal valued at $486 million. Industry contacts said the price tag for GLS was more than $400 million.

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 made this a strategic focus and the PolyOne acquisition “allows us to accelerate the transformation,” Holt told analysts.

Spartech has struggled in recent years, losing more than $70 million combined in its 2010 and 2011 fiscal years. There has also been a revolving door in the firm’s executive suite. Holt is the third person to hold the top job since longtime leader Bradley Buechler was replaced in 2005. These struggles have been reflected in Spartech’s per-share stock price, which was above $14 in early 2010 but was around $5.15 before the PolyOne deal was announced.

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

“Spartech is relatively small,” said Phil Karig, managing director at Mathelin Bay Associates LLC consulting firm in St. Louis. “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,” said Karig, who held a number of executive positions at Spartech from 2000-09. It would be costly to pay big bucks for a specialty business and sell a lower-value commodity business, he added.

Spartech was assembled through many acquisitions — 14 were made between 1993 and 2000 — but those businesses didn’t necessarily run well together, according to Karig. The firm now operates 28 plants in North America, as well as single plants in Mexico and France.

Spartech “had a hard time managing the portfolio they had built,” he said. “The challenge is, if you’re building through acquisitions, what do you do when the pace of acquisitions slows down?”

Avon Lake-based PolyOne said the deal will be a bolt-on acquisition with opportunity for global expansion and will 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.

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.

Compounding market analyst John Jones said he was “a little surprised” when he heard of the PolyOne-Spartech deal.

Buying Spartech “gives PolyOne a dominant position in the sheet market, but I think that a lot of Spartech’s sheet and compounding work is in broad-based, commodity products,” added Jones, president of JRJ Inc., a consulting firm in Wyomissing, Pa.

According to Jones, it might make sense for PolyOne to sell off some of those commodity sheet assets. And although there might be some overlap between the two firms’ compounding assets, Jones said PolyOne might retain some of the Spartech plants in that market because of the large production lines needed to make products such as filled polypropylene compounds.

Several resin makers — including Dow Chemical Co., ExxonMobil Chemical Co., DuPont Co., Westlake Chemical Corp. and Bayer MaterialScience LLC — have downstream businesses, but there aren’t many historical examples of a compounder being involved in downstream products.

Compounder A. Schulman Inc. tried to enter the automotive sheet market a few years ago, but that project never reached full commercialization. Other isolated examples of such downstream moves include compounder Teknor Apex Co., which extrudes PVC garden hose, and Tekni-Plex Inc., which makes hose, tubing and film and also operates its Colorite Compounds compounding unit.

Earlier this year, at an investors 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 its third-quarter profit grew 11 percent to $24 million compared with the year-ago quarter, even as sales were up less than 1 percent to about $740 million.

  The firm’s nine-month sales were up 4 percent to $2.3 billion, but nine-month profit fell almost 60 percent to less than $69 million. Officials said weak third-quarter 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,” said PolyOne Chief Financial Officer Richard 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 and 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, which ranks among the top 30 in North America, according to Plastics News, encompasses polymers and concentrates.

The third quarter of Spartech’s fiscal 2012 ended Aug. 4. In the first nine months of fiscal 2012, Spartech’s sales grew almost 7 percent to about $863 million, but its profit fell 51 percent to about $3.3 million. Custom sheet and roll stock accounted for 52 percent of Spartech’s sales in that nine-month period, with color and specialty compounds generating 27 percent and packaging technologies bringing in 21 percent.

During those nine months, operating earnings for Spartech’s packaging technologies unit fell almost 30 percent, while custom sheet and roll stock slipped 2 percent in that category.

Color and specialty compounds, however, rocketed from less than $300,000 in operating earnings in the first nine months of 2011 to $6.1 million in the same period this year.

The Spartech deal is different from PolyOne’s purchase of ColorMatrix in 2011, Newlin said, because 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 advisers to PolyOne in the agreement, which has been approved by the boards of both companies. Spartech’s financial adviser was Barclays.

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