PolyOne Corp. ended months of speculation Oct. 21 by announcing plans to sell off businesses that generated one-fourth of the firm's sales and employed one-third of its workforce last year.
Avon Lake, Ohio-based PolyOne - which is North America's largest compounder, with a 10 percent market share - plans to sell its elastomers and performance additives, engineered films and specialty resins businesses, in an effort to boost overall profitability and reduce debt. Those businesses generated $617 million in 2002 sales and employ about 2,270 at 15 sites. PolyOne said it has no deadline for divesting the operations.
PolyOne officials declined to say how much they think the targeted businesses are worth, but industry contacts estimate their combined sale value at between $175 million and $250 million.
``In something like this, you start by deciding on what you really want to focus on,'' PolyOne President and Chief Executive Officer Thomas Waltermire said in an Oct. 21 telephone interview. ``If you start from a negative perspective, you could reach the wrong conclusions.''
When deciding which businesses to divest, Waltermire said PolyOne ``looked for the strongest interplay between businesses.''
``Each of the other three businesses have useful connections to the company, such as common raw materials or customer linkages, but not as strong as those in our core groups of businesses in plastic compounding and distribution,'' he said.
The business units slated for divestment are:
* Elastomers and performance additives - primarily rubber compounding - with 2002 sales of $364 million, or 14 percent of total sales. The unit operates plants in Burton, Ohio; DeForest, Wis.; Dyersburg, Tenn.; Jonesborough, Tenn.; Santa Fe Springs, Calif.; Wynne, Ark.; Kennedale, Texas; and Queretaro, Mexico; as well as a headquarters in Solon, Ohio.
* Engineered films - primarily calendered PVC - with $153 million in 2002 sales, 6 percent of the total. The unit operates plants in Winchester, Va.; Burlington, Vt.; and Lebanon, Pa.
* Specialty resins - primarily dispersion-grade PVC - with 2002 sales of $100 million, 4 percent of the total. The unit operates plants in Henry, Ill.; and Pedricktown, N.J.; as well as a headquarters in Avon Lake, Ohio.
PolyOne previously had identified its equity investments in its Oxy Vinyls LP and SunBelt Chlor-Alkali joint ventures as noncore. The company has not made a decision on their potential sale.
The announcement ends speculation that began in December when PolyOne officials said the firm was conducting an extensive business review.
``It's good for people both inside and outside the company to have a clear focus on where we're going,'' Waltermire said, adding that he would prefer to sell the businesses as self-contained units, rather than on a plant-by-plant basis.
Although many in the industry thought PolyOne would shed its resin distribution business, the firm apparently plans to hold on to it.
``Our distribution unit is an efficient, low-cost channel to market for our products,'' Waltermire said. ``It gives us a very wide footprint of knowing people who are using plastics, and it also gives us a stronger relationship with polymer makers.''
PolyOne will use proceeds from the divestitures to reduce debt. In December, the company stated a goal of reducing debt by $200 million to $300 million.
After the sales, PolyOne's operations will include:
* Vinyl compounds, with 2002 sales of $627 million, which represented 24 percent of total company sales.
* Engineered materials, with 2002 sales of $332 million, 13 percent of the total.
* Formulators, with 2002 sales of $180 million, or 7 percent of the total, serves niche plastics and coatings markets.
* Color and additive masterbatch, with $341 million in 2002 sales, 13 percent of total sales.
* Distribution, with $520 million in 2002 sales, 20 percent of the total.
The announcement was prompted by a 21/2-year run during which PolyOne has lost $130 million while closing more than a dozen plants and cutting about 800 jobs. In the first half of 2003, PolyOne lost $25 million, even though sales climbed 2 percent to almost $1.3 billion. The firm is expected to release third-quarter results Oct. 29.
Those who track PolyOne in the investment and consulting communities had mixed views on the divestment announcement.
Saul Ludwig, a stock analyst with McDonald Investments Inc. in Cleveland, agreed with the decision, and said he questioned why PolyOne predecessor Geon Co. entered the targeted businesses in the first place.
``I thought [entering the film market] was a mistake because it's so highly fragmented and it brought the possibility of competing with customers,'' Ludwig said. ``And the dispersion PVC business should have gone into Oxy Vinyls when Geon created that joint venture.''
Ludwig added that he thinks PolyOne management timed the announcement to coincide with recent signs of improvement in the economy.
``In their own mind, [PolyOne officials] probably identified these businesses for divestment a long time ago,'' he said. ``But with the economy picking up, interest in buying businesses might intensify.''
Interest in all three businesses might be limited to financial buyers because of the lack of strategic buyers in the current plastics mergers and acquisitions market. Bayer Corp. recently pulled a similar rubber additives business off the market after unsuccessfully trying to sell it for a year.
John Jones, president of Applied Market Information LLC consulting firm in Wyomissing, Pa., said the divestments will highlight color compounds and concentrates as PolyOne's strengths. Jones added that the announcement had to be made to shore up morale at the firm.
``Any time you work for a division or a plant where nobody knows what's going to happen, everyone's uncomfortable and unfocused,'' he said. ``This is a positive step because [PolyOne officials] needed to say ... what they're doing and move ahead.''
But PolyOne might be hard-pressed to sell the targeted businesses for the same prices it paid for them. The majority of its film business is the former O'Sullivan Corp., which Geon paid $191 million for in 1999. That unit, which now includes a film business acquired from Occidental Chemical Corp., might fetch only $50 million to $75 million in today's market, according to M&A consultant Thomas Blaige in Chicago.
The drop in value is a result of competitive pressures in the calendered PVC market, Blaige said. O'Sullivan reported sales of $163 million in 1998, while the combined O'Sullivan/Occidental films unit had sales of $153 million last year.
Blaige identified three European companies - Solvay SA and European Vinyls Corp. of Belgium and Renolit Group of Germany - as potential buyers of PolyOne's films unit. Another industry source added KlÃ¶ckner Werke AG of Germany to the list of possible film suitors.
In dispersion PVC, Blaige said PolyOne might draw bids of between $50 million and $75 million for the business.
It's a little more difficult to assess the value of PolyOne's rubber compounding unit. M.A. Hanna Co. - another PolyOne predecessor - paid an estimated $80 million for Burton Rubber in 1986. The other large rubber compounding piece came from Colonial Rubber, which was part of Hanna's $340 million buy of Day International Inc. in 1989.
One industry contact estimated that the Colonial portion of Day was worth $140 million at the time, giving Hanna's rubber acquisitions a combined value of $220 million in the late 1980s. Blaige now estimates PolyOne would receive $100 million for that unit, which includes several smaller specialty businesses.
Finding a buyer from within the rubber compounding industry also might be difficult, since the next biggest North American supplier - AirBoss of America Corp. of Newmarket, Ontario - has only one-fifth the rubber compounding sales of PolyOne.
In spite of increases in M&A activity for compounders and film producers outside North America this year, Blaige said PolyOne might find the market for those businesses to be ``really tight.'' PolyOne officials ``might be faced with a tough decision to sell at the prices they're offered,'' Blaige said. ``They might just pull [the businesses] back in.''