Analysts say A. Schulman might up offer for Ferro

Comments Email Print
A. Schulman Inc. Joseph Gingo

FAIRLAWN, OHIO -- Ferro Corp. has rejected A. Schulman Inc.'s hostile buyout offer in a clash between two publicly traded plastics materials and specialty chemicals firms.

Fairlawn, Ohio-based Schulman announced March 4 that it had offered $6.50 per share — half in cash, half in Schulman common stock — to acquire Ferro, which is based in nearby Mayfield Heights, Ohio. The offer represents a 25 percent premium to Ferro's closing per-share price March 1. The entire deal, including debt, is valued at $855 million.

"We would welcome the opportunity to engage in a mutually beneficial dialogue with Ferro's board and management," Joseph Gingo, Schulman's chairman, president and CEO, said in a release. Ferro countered that same day with its own release, in which officials said the firm's board determined the Schulman offer "is not in the best interests of Ferro shareholders," adding that "continued execution of [Ferro's] value-creation strategy will deliver greater value to Ferro shareholders."

That opinion might be a hard sell, however, especially after Ferro on March 5 reported a loss of more than $373 million for 2012, as company sales fell 18 percent to less than $1.8 billion. The loss was fueled by a sales drop of more than 50 percent in the firm's electronic materials unit, which had included solar pastes. That unit had been a growth driver for Ferro, but it had declined to the point where the business recently was sold to German industrial firm Heraeus for an undisclosed price.

Plastics-related businesses accounted for almost 30 percent of Ferro's 2012 sales, but its sales in polymer additives fell almost 5 percent and sales in specialty plastics — including polypropylene compounds and color concentrates — fell more than 1 percent.

Performance coatings, Ferro's largest unit in 2012 with 33 percent of sales, includes production of frit, a ceramic ingredient that the firm has made since its founding in Cleveland in 1919.

Ferro's per-share stock price also has struggled. It was above $12.50 in mid-2011 but fell as low as $2.50 before rebounding. The Schulman offer had pushed Ferro's per-share stock price — which was at $5.20 on March 1 — close to $7 in early trading March 8.

Recent struggles led to the resignation of Ferro CEO James Kirsch in November. Kirsch had been with Ferro since 2004 and had served as CEO since 2005. Ferro veteran Peter Thomas has been serving as the firm's interim CEO.

In a March 7 email, Ferro spokeswoman Mary Abood said, "Ferro's strategy is to divest or curtail investments in substandard operations and assets with inadequate returns on invested capital and refocus on our core competencies, streamline our core operations … and prudently invest growth capital only in projects with high return potential.

"We've made significant progress already on the strategy."

Schulman ranks as one of North America's largest makers of color compounds and concentrates, with a market share estimated by Plastics News at 3-4 percent. Ferro also ranks as one of the region's 30 largest compounders with an estimated market share of 1-2 percent.

In Schulman's fiscal 2012, which ended Aug. 31, the company posted sales of just over $2.1 billion. A combined Schulman-Ferro would have annual sales of almost $4 billion and would employ more than 8,000 worldwide.

In its release, Schulman officials said acquiring Ferro would provide annual cost savings of $35 million. Schulman also posted a 23-page Powerpoint presentation on its website, in which officials said that two-thirds of end markets shared by the two firms have direct alignment. Gingo said in the release that the only Ferro unit that's "not strategic" for Schulman is its pharmaceuticals business, which had sales of only $24 million last year — less than 1.5 percent of Ferro's total sales.

Several market watchers said they expect Schulman to make another, higher bid for Ferro. Increasing the bid by $1 per share would put the total value of the deal close to $950 million, sources said In a March 8 email, Schulman spokeswoman Jennifer Beeman said that "in terms of a second offer, our goal remains the same — to encourage Ferro shareholders to pressure Ferro's board to resume conversations with us."

"Only at that time, and after due diligence, could we determine if a second offer would be warranted," she wrote.

There's some competition between Schulman's and Ferro's compounding businesses, but Beeman said Schulman "doesn't see Ferro as competition," but as a company that could improve Schulman's global footprint, technologies, markets and product offerings. Industry sources said Ferro remains a supplier of some pigments to Schulman, but Schulman officials were unable to confirm that relationship.

Analysts and financial pros familiar with both Schulman and Ferro were not 100 percent enthusiastic about the proposed deal when contacted by Plastics News.

"I have to question the decision," said Dmitry Silversteyn, who covers both firms as a senior market analyst with Longbow Research in Cleveland. "I'm not sure what Schulman is buying. If they can make it work, that's fine, but it might be difficult for them to get some of these [Ferro] businesses to perform."

Silversteyn added that although the two firms have some overlap in plastics, he believes the non-plastics part of Ferro is what Schulman is interested in, since that would allow the firm to become more of a specialty chemicals maker.

At Northcoast Research in Cleveland, research Vice President Kevin Hocevar said he has heard "mixed reaction" from Schulman shareholders about the proposed deal.

"Some [shareholders] think they can get Ferro at the right price, but others have had more of a negative reaction," he said. Hocevar added that potential deals proposed for Ferro in recent years have been for less than what Schulman is currently offering.

Bill Ridenour — president of mergers and acquisitions firm Polymer Transaction Advisors Inc. in Newbury, Ohio — has a unique view on the Schulman-Ferro proceedings. He worked at Ferro for a decade (1981-90) and has had both Schulman and Ferro as clients at different times since starting his own firm.

"I think Schulman will make a higher offer — one that could make an unfriendly offer into a friendly one," Ridenour said. "But there's also a strong likelihood that no one else was interested in Ferro because of its mix of businesses."

He added that Schulman's offer of a 25 percent premium over Ferro's stock price is less than the 33-50 percent premium that's been the average for plastics and specialty chemicals firms in recent years.

Ferro's ceramic-based business "doesn't fit at all" with Schulman and "is slowly declining," Ridenour said.

Market analyst Bruce Petersen also has a historical perspective on the proposed deal, having worked at Schulman for 20 years before departing in 1994. During that time, he also worked with Ferro, which supplied Schulman with several raw materials. Petersen is more positive about Schulman's move, describing the offer for Ferro as "a bold step for Joe Gingo and Schulman management."

"On the face of it, they're doubling the size of the company from a sales perspective," said Petersen, who is now with Mathelin Bay Associates, a St. Louis-based consulting firm. "And although Schulman hasn't been in a lot of these [Ferro] businesses before, the current management team has the required skill sets to return these businesses to profitability."

Petersen compared Schulman's move to recent investments made by the J.M. Smucker Co., the Orrville, Ohio-based firm that's best known for its jellies and jams. Smucker took steps to grow its sales base by acquiring Jif-brand peanut butter and Folgers-brand coffee. Those moves have helped Smucker greatly increase its annual sales and stock price, Petersen said.

A group of unhappy Ferro investors titled the Shareholder Committee for the Future of Ferro has been vocal in its criticism of Ferro management, but the group also said in a March 7 news release that the Schulman offer "doesn't fully value Ferro."

The committee — which owns more than 4 percent of Schulman stock and is led by FrontFour Capital Group LLC of Stamford, Conn. — also was very critical of Ferro management's handling of the Schulman offer. Schulman first approached Ferro in November and made a formal offer Feb. 13.

"Shutting the door on this offer within only two weeks … suggests entrenchment which simply will not be tolerated by [Ferro] shareholders," the committee wrote, adding that Ferro's decision not to have a question-and-answer session on the conference call in which it disclosed the Schulman offer "is inexcusable."

The committee already had nominated three members — including former Solutia Inc. CEO Jeffry Quinn — for the Ferro board to represent its interests. Their membership will be voted on at Ferro's annual meeting, which has not been scheduled. Schulman spokeswoman Beeman said her firm has not approached the activists, but she noted that in the committee's letter, members urged the Ferro board to speak with Schulman officials.

If Schulman succeeds in buying Ferro, the deal will be the firm's sixth acquisition since 2010 — and would be the largest of those six. Schulman also has formed two joint ventures in that time frame. CEO Gingo has been extremely active in reorganizing the 85-year-old company since assuming the top spot in 2008.

Since then, Schulman has exited low-margin businesses, realigned its European footprint and launched production of color and additive concentrates in the U.S. Those moves have included closing seven underperforming plants in the U.S. and Europe and selling off two others.

The bid for Ferro has had little impact on Schulman's per-share stock price on Wall Street. The price was just above $31 on March 1 and was near $32 in early trading March 8.