Geon Co. of Avon Lake, Ohio, is making a big leap into the calendered PVC film and sheet market by agreeing to buy O'Sullivan Corp. of Winchester, Va., for $191 million.
``Acquiring O'Sullivan marks a milestone in positioning Geon as a key player in the engineered film market and establishes a new growth platform for us,'' Thomas Waltermire, Geon president and chief executive officer, said in a news release.
Geon offered $12.25 in cash for each share of O'Sullivan. O'Sullivan stock had traded at $9.375 per share June 1, the day before the deal was announced. The boards of both companies have agreed to the deal, as have members of the Bryant family, which controls 26 percent of O'Sullivan shares.
Geon, a longtime giant in the PVC resin and compound markets, has been a major raw material supplier to O'Sullivan for many years, winning the company's Best Supplier award several times.
Geon entered the PVC film world in 1998 when it acquired Occidental Chemical Co.'s film works in Burlington, N.J. The O'Sullivan deal adds $163 million in sales, four plants, six calendering lines and almost 1,000 employees to the Geon mix.
The combined Occidental-O'Sullivan output would rank Geon 30th among North American film and sheet manufacturers, based on figures from Plastics News' 1998 industry ranking. In the PVC calendering field, Geon now will rival Nan Ya Plastics Corp. USA of East Hanover, N.J.
O'Sullivan, founded as a rubber-sole manufacturer in 1896, operates plants in Winchester; Lebanon, Pa.; Newton Upper Falls, Mass.; and Yerington, Nevada.
``We looked at ourselves several years ago and realized we had to get bigger,'' O'Sullivan President J. Shep Campbell said in a June 2 telephone interview. ``This arrangement will allow us to do things more quickly.''
Initial Wall Street reaction to the deal was positive, as Geon stock climbed from around $31 to $35 per share, as of June 3. Geon officials hope to have the deal wrapped up by July.
The acquisition will give Geon access to the automotive market, which accounts for 55-60 percent of O'Sullivan's sales. Calendered PVC sheeting commonly is used on dashboards and door panels. O'Sullivan's customers include Ford, Chrysler, General Motors, Honda, Toyota, Mazda and Saturn.
O'Sullivan sheet and film also is sold into consumer and industrial markets, where it is used in products such as home furnishings, medical bags and pouches, pool liners and geomembranes.
The acquisition will help Geon develop ``a full plate of automotive products,'' Dennis Cocco, Geon vice president of corporate and investor affairs, said in a June 2 telephone interview.
Ironically, the increasing size of the automotive market played a major role in O'Sullivan's decision to sell to Geon, according to O'Sullivan's Campbell.
``We saw the DaimlerChrysler deal and Ford's deal with Visteon and knew we had to do something, since the Tier 1 automotive firms were growing as well,'' Campbell said.
O'Sullivan reviewed several expansion and acquisition plans before hiring mergers and acquisitions firm Bowles Hollowell Conner & Co. of Charlotte, N.C., last August.
In fact, O'Sullivan had asked Geon if it was interested in selling the Burlington site.
O'Sullivan slowly has dismantled its operations since 1994, when it sold its Gulfstream injection molding unit to Automotive Industries Holding Inc. for $70 million. Automotive Industries then was bought by Lear Corp. in 1995.
The Gulfstream sale was prompted by Ford's decision to drop O'Sullivan from its list of prime interior-trim suppliers. The firm's sales dropped from $292 million in 1993 to $195 million in 1994.
O'Sullivan also sold its Melnor Industries lawn and garden division, the last of its injection molding holdings, to Gardena Holding AG of Ulm, Germany, in 1997.
O'Sullivan's stock price had languished between $8 and $11 per share since 1997. Campbell said O'Sullivan had been creative in ``breathing life into an old molecule like PVC,'' but Wall Street had not been receptive to its efforts.
``It's hard to get that impression through to Wall Street unless you're America Online or have some huge multiple,'' Campbell said.
``It's the same for all of the smokestack industries.''
For Geon, the move is part of its strategy to grow into different market segments and materials in an attempt to reach $2 billion in sales by the end of 2000. The firm's 1998 sales were $1.3 billion.
Geon has taken a value-added approach to growth, most notably by merging its resin business with that of Dallas-based OxyChem to form Oxy Vinyls LP. Geon holds a 24 percent stake in the venture, which is North America's largest PVC maker.
Geon, which now holds 40 percent of the North American PVC compounding market, acquired Oxy's compounding and film and sheet business in Burlington as part of the deal.
Cocco added that Geon was not deterred by its relative inexperience in the film and sheet market.
``Obviously this isn't an area we've been particularly involved in,'' he said.
``But in looking at the marketplace, we thought there were some definite opportunities we'd be interested in. We think this will complement the business we have in Burlington without a lot of overlap.''
The fragmented nature of the film and sheet manufacturing industry should allow Geon to make acquisitions without much difficulty, according to Fred Siemer, a stock analyst with F.H. Siemer & Co. Inc. in Highland, N.Y.
But Siemer added that he has some reservations about Geon moving into plastic processing, which he described as ``a low-growth, low-profit industry.''
Frank Mitsch, a stock analyst with Deutsche Bank Securities in New York, had no such reservations about the deal.
``This is in keeping with what Geon has been doing — decommoditizing themselves and moving further downstream and away from the resins business,'' Mitsch said.
``I think Geon will continue doing these sorts of deals in keeping with their strategy.''
The Geon-O'Sullivan deal is ``probably a good thing'' for O'Sullivan, according to Michael Beall, a stock analyst with Davenport & Co. in Richmond, Va.
``O'Sullivan's done a good job of cleaning up the company in the last couple of years, but it was at a crossroads where it had to get bigger or become part of a larger corporation,'' Beall said. ``Geon got a good deal in what they paid, but O'Sullivan didn't give it away, either.''