Stephen Newlin has been in the chemical industry for 33 years. In that time, he says he's never been more excited about an acquisition than he is of PolyOne Corp.'s recent purchase of ColorMatrix Group Inc.
Newlin has almost half-a-billion reasons to be excited. He's the chairman, president and CEO of PolyOne, the Avon Lake, Ohio-based materials firm that's paying $486 million for ColorMatrix, a maker of liquid colorants, additives and fluoropolymers in Berea, Ohio.
“Among the multitude of opportunities we reviewed this was by far the best,” Newlin said during an Oct. 25 conference call with stock analysts. “ColorMatrix is a true specialty company ... with a relentless focus on innovation and customer service.”
Newlin described ColorMatrix's 98 percent customer retention level as “the highest I've ever seen.” ColorMatrix has annual sales of almost $200 million and had pretax profit of almost $44 million in the year ended June 30.
For PolyOne, the acquisition means that more than half of its sales now will come from specialty businesses. Newlin has aggressively focused the company on specialties since he moved into the corner office in 2006.
PolyOne's John Van Hulle described ColorMatrix as “a highly specialized company with a premiere suite of application technologies” and 162 patents. ColorMatrix “has a strong reputation for innovative technologies,” he said during the conference call.
He also pointed out that 95 percent of ColorMatrix's liquid color customers use the firm's proprietary dosing equipment. Van Hulle referred to this as a “razors and razor-blades approach.”
Liquid colorants account for 42 percent of ColorMatrix's sales, with 38 percent coming from performance additives and 20 percent from fluoropolymers and silicone colorants. Packaging is the firm's largest end market with a 54 percent shares of sales.
North America is ColorMatrix's largest sales region with a 30 percent share, just ahead of Western Europe at 29 percent. Officials said that ColorMatrix leads the global liquid colorant market with a 34 percent share.
Newlin also addressed the 11x multiple that PolyOne is paying for ColorMatrix. That's a higher multiple than Audax Group — an investment firm in Boston — paid for the firm in 2006.
“This is a game changer for PolyOne, much like when we acquired [GLS Thermoplastic Elastomers] in 2008,” Newlin said. “And much like with GLS, we're paying a fair price for ColorMatrix. [The price] is in line with specialty company multiples.”
Specialty companies “trade at substantially higher multiples than commodity companies because they offer differentiated products and services with high barriers to entry and double-digit earnings growth trajectories,” he added.
Newlin also cited his pre-PolyOne career when he spent 27 years working for specialty chemicals firms Nalso Chemical Co. and Ecolab Inc. Newlin described those firms as “two excellent specialty companies that trade at these multiples.”
“GLS sold at a higher multiple, and we've grown earnings threefold since acquiring it,” he said.
The ColorMatrix deal didn't happen overnight for PolyOne, which ranks as North America's largest producer of compounds and concentrates and as one of the region's largest resin distributors.
“Often, companies make acquisitions for the wrong reasons,” Newlin said. “But this is no cost play or capacity reduction strategy. We had our eyes on [ColorMatrix] for five years, as did many others. It was a competitive bidding process.”
He also addressed some of his comments to ColorMatrix employees, saying “I assure you this is not a buy and flip story ... but a long-term investment in the future.”
Plastics News asked several executives in the concentrates market — many of whom compete with PolyOne — for their reactions to the PolyOne-ColorMatrix deal. Most of their reactions were positive.
“Specialties are a very ambitious undertaking, but PolyOne has been very consistent in what they said they'd do,” said Bert Lederer, executive vice president at Teknor Apex Co. In Pawtucket, R.I.
Steve Snow, North American business director for Clariant Masterbatches in Holden, Mass., described the deal as “a very good move,” while Joseph Gingo, chairman, president and CEO at A. Schulman Inc. in Fairlawn, Ohio, said buying ColorMatrix was “a transformational move” for PolyOne.
“This isn't a bolt-on acquisition,” Gingo said. “They had to pay the price, but it's similar to when we acquired [ICO Inc. of Houston]. We got [our investment] back a year ahead of schedule.”
Some industry executives, however, had a hard time looking past ColorMatrix's price tag. Robert DeFalco, president at Ampacet Corp. in Tarrytown, N.Y., said that his firm “looked at [ColorMatrix] a few years ago, but passed on it because we thought the price was too high.”
“We're a privately held company, so we can't bite off more than we can chew,” he said.
John Manuck, president of Techmer PM LLC in Clinton, Tenn., added that he “was shocked” by the price that PolyOne paid for ColorMatrix. “I think sometimes a public company has to overpay for assets,” he said.
But industry consultant John Jones said that he thinks the deal will work out OK for PolyOne in the end.
“ColorMatrix is a real prime company, and it should fit in with PolyOne,” said Jones, owner of JR Jones Inc. in Wyomissing, Pa. “PolyOne is becoming the ultimate specialty products company. They've done a tremendous job.”