A lot of plastics and specialty chemicals companies are looking in the mirror these days to find out if they like what they see.
``Many companies are increasing their portfolio focus,'' said Rod MacDonald, a managing director with the industrial group of KeyBanc Capital Markets in Cleveland. ``They're evaluating and seeing which businesses they really want to be in. If not, they might elect to divest.''
MacDonald has firsthand knowledge of such decisions from having worked in recent years on banking deals involving plastics heavyweights PolyOne Corp. and Spartech Corp. KeyBanc Capital Markets is a unit of KeyCorp, a Cleveland-based financial firm that oversees $95 billion in assets.
MacDonald summed up some of the issues facing similar companies in plastics and specialty chemicals in an Aug. 2 telephone interview.
As an example of an increased portfolio focus, MacDonald cited Lubrizol Corp.'s $1.8 billion purchase of Noveon Inc. in 2004. That move got Lubrizol - a maker of lubricant additives and other specialty chemicals based in Wickliffe, Ohio - into the plastics market for the first time, via the specialty plastics lineup offered by Brecksville, Ohio-based Noveon.
Lubrizol followed up that purchase by selling off five units - some from Lubrizol, some from Noveon - that had annual sales of $500 million.
Buying Noveon ``was a defining move for Lubrizol,'' said MacDonald. ``They saw that some businesses were attractive and complemented their sales while others did not. And they took action.''
More recent deals in the plastics/specialty chemicals sector include Ferro Corp.'s pending sale of its plastics compounding business. According to a source close to the deal, Wind Point Partners of Chicago is buying the business for an estimated $140 million. Also, Audax Group this year bought a stake in liquid-color maker ColorMatrix Corp. for an estimated $175 million. Both Wind Point and Audax are private equity firms.
``There's an enormous amount of capital going into these [private equity] funds,'' MacDonald said. ``These companies are very eager to do transactions, and I see that continuing because of the borrowing capital that exists. Credit is still relatively cheap.''
Buyers from within the industry still are active, MacDonald added, but they're challenged by concerns over natural gas and other raw materials. Natural gas prices had bounced between $5.50 and $7 per million Btu in the May-July period before shooting as high as $9.25 in the last week.
``With the heat and concerns about hurricane season, there's been a lot of demand [for natural gas], and the question is, when will it abate?'' MacDonald said. ``We saw what happened last year [after the hurricanes], so now it becomes a question of, when does a higher [natural gas] price impact demand?''
Publicly held plastics and specialty chemicals firms also have to contend with the changing whims of the investment world.
``We continue to see investors looking at the overall economy, but also looking at small-cap companies and saying they don't know how long the ride will continue,'' he said. ``We may see some [investors] rotate from small-caps into large-caps and that may affect [per-share] pricing of the small-caps. We're seeing a little bit of that now.''
But MacDonald - whose financial career began with National City Corp. in 1978 - added that the overall mood among the companies he works with remains fairly positive.
``Anecdotally, things seem pretty good,'' he said. ``Industrial activity and [mergers and acquisitions] activity was very strong last year and has remained strong into this year. Some people think the housing market might slow down, and the automotive market can still be problematic in North America, but consumer spending still remains pretty strong.''
