A. Schulman takes long view after tough time

There are basically two roads forward for the Fairlawn, Ohio-based plastic compound maker A. Schulman Inc., according to analysts who follow the company.

One is likely long and leads to an independent future, where the company regains its stock value with its own earnings and, perhaps, again becomes an acquirer of other companies. The other leads to Schulman being purchased itself, by a private equity firm or maybe even a competitor.

CEO Joe Gingo is putting on boots for the longer slog, though even he concedes the ultimate choice of routes might not be his to make.

Gingo, who was brought back to the helm in August to right the Schulman ship, said he will unveil a five-year plan to investors later this year, with the backing of a third-party adviser to check and vouch for his numbers and projections. The company announced on Sept. 13 that Citi will be in that role.

Gingo said he knows bringing in an outside adviser adds to speculation that the company could be sold, but said he needs the credibility such a firm can bring.

"I really have to look at the numbers, and I have to believe the numbers … I want a third party to take a look at those numbers, too, because we've lost credibility. We can come out again with numbers that I believe in, from my people, who are good people. But it would be really good to have a respectable third party also say, 'Yes, these numbers make sense,'” Gingo said.

Schulman lost credibility last year when it twice surprised the market by adjusting its earnings guidance downward — for a total of 70 cents per share. The second time that happened, in August when the company reduced its annual earnings estimate from $2.45 to $1.95 per share, the company's stock price plunged more than 30 percent to a little more than $21 per share. That was the reason, Gingo said, the company's board brought him in to replace then-CEO Bernard Rzepka. Gingo is also board chairman.

At 71, Gingo was planning to be retired by now, but said he's fully prepared to fulfill his two-year contract as CEO, and a third year if the company opts for it. And he has credibility with analysts and investors, many of whom credit him with turning Schulman around during his previous tenure as CEO, from 2008 to 2014.

But even Gingo concedes the future is not entirely in his control. Schulman's stock is trading on the cheap. After trading at a record high of more than $40 per share in early 2015, its stock price has since dropped to below $30 and stayed there, while the market as a whole has gone up.

Gingo has some headwinds to fight. With slow growth in some of its core markets, significant operational challenges and $900 million in debt to pay off, Schulman has a long, steep road ahead of it — and the company, its investors and CEO might not have the horsepower, patience or stamina to climb it, analysts say. A sale of Schulman, which trades under the sticker name SHLM, might provide the quickest and best way to reap a return for investors, especially if the company can address some immediate issues to increase its potential price.

The analysts' take

“I've always thought of Schulman as a very amenable takeout candidate," said analyst Dmitry Silversteyn, who follows the company for Independence, Ohio-based Longbow Research.

Silversteyn said other materials companies that are currently strong, such as Ferro Corp., could have an interest in purchasing Schulman, as might private equity investors.

"This could be a private equity buy. It could be a Chinse or a Latin American company looking to get a footprint in America and some credibility with customers. [Schulman's] relationship with Audi, BMW and others is very attractive to other players … So, yeah, I think they could be an attractive acquisition target," said Silversteyn.

Analyst Kevin Hocevar, of Cleveland-based Northcoast Research, agreed. In suggesting that investors buy Schulman stock in an Aug. 26 report, Hocevar wrote: "For starters we believe there is a motivated Gingo taking back the reins at [Schulman] and his business plan review could result in a lot of different things including cost savings plans … and divestitures of part of [or potentially all of] SHLM."

Hocevar thinks there's likely less interest from potential strategic corporate buyers than there would be from private equity firms.

"I believe private equity would be the most likely buyer at this point," Hocevar said in email correspondence with Crain's Cleveland Business, a sister publication of Plastics News. "I am not sure there is a strong candidate from a strategic buyer standpoint. PolyOne was cited for years as being the likely candidate to acquire [Schulman], however I don't think that's likely anymore. Maybe many years ago this would have been possible, but [PolyOne and Schulman] have gone in different directions."

The Citadel impact

It was not long ago that Schulman was a buyer of companies. In 2013, it paid $800 million for Citadel Plastics, an Indiana firm that was a roll-up of other plastic companies put together by investor groups. It was the largest acquisition in Schulman's history and brought $550 million in new annual sales, effectively doubling Schulman's size.

But that deal quickly generated severe buyer's remorse. Schulman said it found fraud in terms of how Citadel's financial condition was represented before the purchase. Schulman also has had unexpected troubles with some of the Citadel plants it took over — especially those working with recycled plastics, where margins were already thin and there was no room for errors.

Schulman has filed suit against Citadel's sellers, California-based Huntsman Gay Capital Partners and the Boston-based firm Charlesbank Capital Parners. It claims the sellers, along with some former executives, committed fraud in selling Citadel.

But what that lawsuit will do for Schulman remains to be seen. Schulman could get some repayment, or even punitive damages, but it's unlikely the deal could be fully undone.

"That's just not practical," Gingo said.

And such lawsuits can take years to go through the courts and appeals processes. In the meantime, Schulman has to figure out how to work with the troubled Citadel plants it purchased, while also dealing with a massive debt load that resulted from the acquisition.

Couple that with slow global economic growth for Schulman's plastics, and Gingo's challenge is significant, analysts said.

But, they add, it is not insurmountable, and Gingo might be the right person for the job.

"Can this be turned around? I think so," said Silversteyn. "I'm intrigued by some of the things Joe has said in print, particularly about looking at their end markets."

That might mean selling some of, but not the entire, company, he said.

Gingo said partial divestitures are an option he's already considering.

"We're going to be looking at capacity and at our business model and whether all our businesses fit. If they don't, I may be looking at divestitures, but of individual business units," Gingo said. "I want to improve our performance. That's my goal. My goal is not to sell the company … If someone walks in with an offer, that's one thing, but that's not the same as looking for a buyer."

One person who is definitely rooting for Gingo to succeed is William Roth, the mayor of Fairlawn.

"They're the No. 1 taxpayer right now. That changes by the year, but they're always in the top five. I've been mayor for 21 years, and they've always been in the top five," Roth said. "They're a good firm. I know they've had a blip in the radar … but, obviously, we hope they prosper. They've been a good corporate citizen, and they're good people."