A. Schulman Inc. has pulled the trigger on one of the largest deals in the firm's 81-year history: buying ICO Inc. in a transaction valued at almost $200 million.
Schulman — a major compounder and distributor based in Fairlawn — on Dec. 2 signed a definitive deal to buy Houston-based ICO, a global polymer powder and plastic film concentrates producer. The deal beefs up Schulman's position in global markets for rotational molding and masterbatch materials.
In a Dec. 4 interview at Schulman's Fairlawn headquarters, top Schulman executive Joseph Gingo said acquiring ICO allows Schulman to meet two of its three major strategic goals — growth in rotomolding and masterbatch concentrates.
“It's rare that you can find a deal that hits on two out of three,” said Gingo, who serves as Schulman's chairman, president and CEO. “We're very excited about this opportunity.”
The only goal left unmet by the ICO deal is growth as a niche player in engineering plastics — and Gingo said the firm is looking at acquisitions in that area.
The value of the deal, which still requires ICO shareholders' approval, is $191.4 million — $105 million in cash plus 5.1 million shares of Schulman common stock. After it closes, ICO shareholders will own about 16 percent of the combined company.
The transaction is not subject to a financing contingency. Schulman plans to pay the cash portion of the purchase price out of about $230 million in cash on hand.
ICO reported sales of almost $300 million in the fiscal year ended Sept. 30 — a 33 percent decline from the previous fiscal year. The firm lost $1.2 million in fiscal 2009 after registering a $15.3 million profit a year ago.
Both firms are publicly traded. Wall Street reaction to the deal was mixed, with ICO shares rocketing 45 percent to $6.55 in late trading Dec. 3, while Schulman shares fell 2 percent to $16.65.
Saul Ludwig, a stock analyst with Key Banc Capital Markets Inc. in Cleveland, said ICO's product mix and size “makes a lot of sense for Schulman.”
“Rotomolding is an area that [Gingo] has said he wanted the company to be in for a while now,” Ludwig said Dec. 3 by phone.
“It's a fair price, given the potential of the combined companies,” he added. “And I think it's interesting that ICO is taking about half the deal in Schulman stock. That shows that [ICO management] thinks they're getting a deal that will create value. If they were taking cash, you can't make that argument.”
Gingo said that ICO would have liked even more Schulman stock to have been included in the deal.
“They asked for that from the beginning,” he said. “We didn't want to be diluted to our shareholders, but we found an amount [of stock] that made sense.”
In a Dec. 2 news release, Gingo highlighted Houston-based ICO's position as a global leader in size reduction, which is a sector that Schulman does not currently serve, and the geographic spread of ICO's masterbatch business. He also touted ICO's strong balance sheet, which will help Schulman's growth plans. The companies expect to achieve savings of $15 million by the end of fiscal-year 2011, as a result of the consolidation and centralization of global purchasing activities, tax benefits, and elimination of duplicate public company costs.
ICO has 20 locations in nine countries. The firm's Bayshore Industrial subsidiary produces specialty compounds, concentrates and additives primarily for the plastic film industry. ICO's largest unit is ICO Europe, which generated 45 percent of total 2009 sales.
ICO's U.S. sites include a compounding plant in LaPorte, Texas, size-reduction plants in Allentown, Pa., and Grand Junction, Tenn., and plants that provide both of those services in East Chicago, Ind.; Fontana, Calif.; and China, Texas.
Gingo said Dec. 4 that after the deal closes, Schulman “will look at our assets and decide if some need to be combined.”
“We didn't do this to close plants, but corporate offices in the U.S. and Europe will be consolidated,” he said. “We might be able to move some equipment between plants. We'll look to optimize our global footprint.”
In a news release, ICO President and CEO A. John Knapp Jr. said the Schulman deal is in the best interest of ICO shareholders.
Schulman is “well-positioned to pursue a long-term strategy of profitable growth and value creation that is consistent with our vision at ICO,” he said. “The ICO and A. Schulman businesses are largely complementary and synergistic with little overlap in end use and geographic markets.”
“We have built a great team at ICO Inc., and during our years of working together with A. Schulman, we have been highly impressed with the enthusiasm and energy of their team,” Knapp added. “We believe the chemistry will be outstanding when the integration takes place.”
The deal is expected to close in the spring of 2010. Knapp — a real estate investor who joined ICO's board in 2001 and who has led the firm since 2005 — is not expected to remain with the firm. In March, ICO had launched a search for a new CEO, allowing Knapp to return to the board.
ICO board members Eugene Allspach and Gregory Barmore will be added to the Schulman board. Allspach is a longtime petrochemical industry veteran who once led polyolefins major Equistar Chemicals. Barmore is a former GE Finance official who worked under GE legend Jack Welch.
The acquisition ends a tumultuous decade for ICO. The firm was controlled by the Pacholder family for almost 20 years until investment firm Travis Street Partners led a hostile takeover in 2001, citing poor management. The takeover succeeded in 2002, but ICO's results quickly declined, leading it to close several plants and to sell off its oilfield services business to pay off debt.
ICO's stock price fell under $1 per share in late 2003, but gradually rebounded, peaking near $15 in late 2007 before the global recession set in.
Schulman employs about 2,000 at 16 manufacturing sites in North America, Europe and Asia. It did $1.3 billion in sales for the year ended Aug. 31 — a drop of 36 percent vs. the previous year.
For Schulman, the move is a major strategic shift. The firm has been closing and selling off plants in recent years, although it plans to open a plant in India next year. Schulman has cut 160 jobs since late 2008 and temporarily reduced the operating hours of its plants in Bellevue, Ohio, and Nashville, Tenn.
On the plus side, Schulman is progressing with a $10 million upgrade of its plant in Akron, Ohio. Officials said that expansion won't be affected by the ICO deal.
Schulman lost almost $3 million in its 2009 fiscal year, which ended Aug. 31. The loss was tied into a $19 million restructuring charge, which eliminated what would have been a $16 million profit for the year.
Less than 48 hours after the Schulman-ICO deal was announced, Gingo was at work on the integration of the two firms.
“I'm impressed with ICO's business leaders,” he said. “This is going to be a good fit.”
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